Central Bank Governor puts number on tipping point for oil prices

The Governor of the Central Bank, Dr Nandalal Weerasinghe, said the country would be able to manage the current inflationary pressures if global oil prices remained around 80 US dollars a barrel for the remainder of this year and the next.

He was speaking on a morning show in Australia.

Dr Weerasinghe said Sri Lanka, as a net energy importer, was heavily exposed to global energy shocks, and pointed out that inflation had already climbed from around 2% earlier this year to close to 7%, the upper edge of the Bank's target.

"We have predicted, in the baseline scenario, that if oil prices remain around USD 80 a barrel for the rest of this year and next, then we can manage the situation," he said. "So if there are any surprises, then obviously we have a challenge."

The Governor further stated that under the Bank's current prediction, prices were moving around that USD 80 level. "If it remains at that level, I think we can manage inflation. We are expecting inflation to come down, around our target level of 5%, by early next year."

Inflation stood at 6.8% in June, and rose to 7.3% in July, both above the Central Bank's 5% target.

Pressed on whether current monetary policy was tight enough, Weerasinghe pointed to the Bank's surprise rate hike of 100 basis points in May.

"When you look at our tightening in May, it's very proactive and sharp. It surprised the market, by a hundred basis points there," he said. "We did that because we saw inflation was coming up, moving around 7% for a couple of months this year."

He said the measure was aimed, first, at containing inflation expectations, secondly at slowing down credit growth, which was expanding rapidly, and at avoiding any undue pass-through, or persistent inflation from the current high levels, as a result of oil prices.

Weerasinghe indicated that the Bank had done enough for now, having held rates steady at its last meeting, with the currency stabilising and credit growth easing. His confidence, however, rests on the assumption that oil prices remain near 80 dollars a barrel. Anything higher, he conceded, and Sri Lanka has a problem.