LNP – Inflation to return to positive from 2Q before aligning with 5% target from 3Q

• Central Bank’s loose policy to stoke inflationary pressures back again, helped by higher demand for credit and goods

Sri Lanka could see the end to the current stretch of deflation in the second quarter before reaching the target level of 5.0 percent in the third, supported mainly by the accommodative monetary policy stance, which the Central Bank has been pursuing from the middle of 2023, pivoting from the bone-crushingly tight policy that decimated both demand and supply.
Releasing the explanatory report on the deviation of the inflation target for two consecutive quarters in the second and third quarters of 2024, the Central Bank said inflation is expected to flip into the positive from the second quarter of this year.
Sri Lanka has seen a continuous stretch of deflation, starting from September last year through December 2024 and the authorities expect the path to continue through the first quarter, before turning around.

In its latest inflation print for December 2024, the Colombo district consumer prices fell 1.7 percent from a year ago while the national prices fell 2.0 percent.
“Quarterly headline inflation is expected to gradually return to the target range by the third quarter of 2025,” the Central Bank said in the report submitted to Parliament on January 10, via the Finance Minister.
“… inflation is expected to reach positive territory by the second quarter of 2025. The current projections indicate that headline inflation will reach within ±2 percentage points from the inflation target of 5 percent during the third quarter of 2025,” it added.
The new Central Bank Act, which came into force from 2023, required the Central Bank to submit a report to Parliament, if it fails to meet the inflation target with a 2.0 percent margin on either side for two consecutive quarters.
According to the quarterly inflation measured by the Colombo Consumer Price Index, the most watched gauge for prices, it fell 1.4 percent and 0.8 percent, respectively in the second and third quarters of 2024.
Sri Lanka has cut policy rates effectively by 775 basis points since the Central Bank pivoted to monetary policy easing in June 2023, activating the credit and consumer markets again after crushing them for at least two years since it raised the policy rates to sky high levels back in April 2022.
The Central Bank therefore expects the demand for credit and demand for goods and services to stoke inflation back again from now on.
“This loosening of the monetary policy stance of the Central Bank in November 2024 is expected to facilitate higher credit flows to productive activities, thus supporting the recovery of the economy in the period ahead,” the Central Bank said of its most recent cut in the policy rates by setting the newly introduced Overnight Policy Rate at 8.00 percent.