*Price increases due to flooding not a major worry, expected to be temporary
Financial market worried about rising international commodity prices


Domestic food prices are expected to increase due to the floods affecting the north and east but dealers said inflation driven by domestic factors was the least of their concerns. Domestic financial market analysts are more worried about rising commodity prices in global markets.

Dealers said their biggest worry was the weakening US dollar caused by excessive money printing was driving international commodity prices up. "Our only hope is that China would increase its policy rates so as step its domestic demand which could ease pressure on global commodity prices," a dealer said.

The recent floods could put pressure on inflation, but dealers said they expected interest rates to remain stable over the coming months.

"Inflation pressure driven by supply-side issues because of crop losses and disruption of distribution mechanisms due to the flooding is likely to be temporary," a dealer said.

"We expect agriculture in the north and east would recover within a few months and probably by March prices should stabilise before some upward pressure is exerted due to the Sinhala and Tamil New Year in April. But for the most part, the affect on prices caused by the flooding is not expected to be huge," he said.

Dealers said even though inflation experiences an upward surge, they expected policy interest rates would remain stable, perhaps there would be another downward revision considering the excess liquidity in the banking system averaging well over Rs. 100 billion each day."When inflation was 28 percent (in June 2008) interest rates were around 19 percent, which means that interest rates do not necessarily increase in leaps and bounds like inflation. With inflation below 7 percent (6.9 percent last December) and lending rates at double digit levels, we are unlikely to see an increase in interest rates due to inflationary pressures caused by the flooding. This pressure is expected to subside in two to three months we believe," a dealer said.

But dealers said their biggest worry was how international commodity prices behaved, being an import dependent economy, sharp increases in global commodity prices could have drastic affects on inflation here in Sri Lanka.

"Inflation caused by the flooding is not a major concern, but our biggest worry is how international commodity prices behave," a dealer said.

The US dollar is weakening as the Federal Reserve continues to print more money. Japan too is following the same course followed to a lesser extent by the EU. "This is putting pressure on international commodity prices. Our only hope is that China increases its monetary policy rates. This would curb its demand to a certain degree and ease pressure on global commodity prices," a dealer said.

Dealers said the expansionary monetary policy of the US and other economies were being watched with some concern. "We are an import dependent economy. An upsurge in global commodity prices will hit us badly unless the government is in a position to provide subsidies," a dealer said.

Earlier, some global analysts had warned that oil prices could reach US$ 100 per barrel this year. If this happens the Central Bank said it would have to rethink its monetary policy stance. The Central Bank recently cut policy interest rates by reducing the repurchase rate by 25 basis points to 7 percent and reducing the reverse repurchase rate by 50 basis points to 8.50 percent.

Three weeks in to 2011, some global analysts are now saying oil prices could reach US$ 105 this year.

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