Economy ‘recovering fast, no problem with deflation’

According to official data, Sri Lanka’s inflation fell 2.1 percent in the 12 months to November 2024, while the index fell back to September 2022 levels amid the central bank’s deflationary policy and currency appreciation.

Colombo Consumer Price Index (re-based) fell from 0.3 points in November 2024 to 189.4 points which is around the 189.3 points in September 2022.

After rate cuts enforced by inflationary open market operations triggers a currency crisis and draws the International Monetary Fund, pegged currencies are usually not encouraged to appreciate based on a Mercantilist doctrine called ‘competitive exchange rates’.

But, the central bank under Governor Nandalal Weerasinghe has allowed the exchange rate to appreciate, boosting disposable incomes and a faster economic recovery and reserve collection.

Under so-called ‘flexible inflation targeting’, interest rates are usually slashed by crisis-prone central banks on the claim that 12-month inflation is low using 12-month ‘real interest rates,’ which is a statistical or econometric argument .

Governor Weerasinghe, however, pointed out that inflation was very high over the recent past, the economy was recovering fast, and there was no problem with ‘deflation’.