COLOMBO: Sri Lanka's key inflation rate fell to 0.9 percent year-on-year in March from 5.9 percent in February, the statistics department said on Thursday.
The Colombo Consumer Price Index, a leading indicator for broader national prices, tracks inflation in Colombo, Sri Lanka's biggest city. The inflation decrease was largely driven by a 22 percent reduction in power tariffs for households earlier this month. Inflation decreased to negative 4.7 percent in the Housing, Water, Electricity and Gas category.
Food prices rose 3.8 percent in March from 3.5 percent in February, the Department of Census and Statistics said. Prices for non-food items rose 0.5 percent this month from 7 percent year-on-year in February.
"This is a much lower than expected reduction. Our projection was that it would be about 2.6 percent. However, we see inflation return to a slightly upward trend in April," said Dimantha Mathew head of research, First Capital.
"This will help economic growth pick up as well."
Sri Lanka racked up record high inflation that peaked at 70 percent in September 2022 after its economy was pummelled by the worst financial crisis in decades, triggered by a plunge in foreign exchange reserves.
Helped by a $2.9 billion program from the International Monetary Fund Sri Lanka's economy has slowly stabilised and is expected to return to growth this year after contracting 2.3 percent in 2023. The economy grew 4.5 percent in the fourth quarter setting the stage for a recovery this year.
Inflation is likely to remain in line with the 5 percent target for the next 12-18 months, Sri Lanka's central bank said this week, after reducing policy rates by 50bps. In total, the Central Bank of Sri Lanka has reduced policy rates by 700bps since last year to help the island nation's economy return to growth. The bank had kept its policy rates unchanged in January to tame inflation after a 3 percent sales tax increase at the start of the year pushed up prices.
The central bank stressed the need for market interest rates to continue to move down, and said demand conditions remain subdued while the recent tax policy change was having a lower-than-expected impact on inflation.