Prolonged high oil prices could push up inflation: CBSL Governor

Sri Lanka could face higher inflation if global oil prices remain elevated for a prolonged period, Central Bank Governor Nandalal Weerasinghe said.

Inflation, measured by the Colombo Consumer Price Index (CCPI), hit a 40-month high of 8.1 percent in September, driven mainly by market-reflected fuel prices and their spillover effects on the wider economy.

The state-owned Ceylon Petroleum Corporation (CPC) has increased fuel prices by around 50 percent since the outbreak of the conflict in the Middle East.

Speaking at an institutional investor forum jointly organised by the Colombo Stock Exchange and the Securities and Exchange Commission of Sri Lanka this week, Weerasinghe said the Central Bank had factored in higher oil prices in its June projections, expecting crude prices to settle at around US$90 a barrel towards the end of the year.

“Right now, it appears now is still at an elevated level than what we expected,” he said.

However, he said Sri Lanka should be able to manage inflation at current levels even if global oil prices remain around US$100 a barrel.

“But even with that elevated level still, we think even around $100 a barrel, we should be able to manage this inflation at current levels,” he said.

Weerasinghe warned that a prolonged period of elevated oil prices could trigger further supply-side shocks and push domestic prices higher.

“That’s going to see higher inflation than what we see now,” he said.

He said the Central Bank would have to assess the source of inflation before deciding whether monetary policy measures were necessary.

“The question is whether we need to fight with monetary policy or not… because we have to see source of inflation and whether that is creating anchoring future expectation as well as creating kind of a demand conditions on the other side,” he said.

“Monetary policy is mainly demand-driven. That’s what we are focusing on.”

Sri Lanka remains heavily dependent on imported fossil fuels for electricity generation, transport and agricultural activities. Higher global crude prices therefore increase import costs and feed into production, transport and distribution expenses across the economy.

With fuel prices now linked to market conditions under the country’s IMF-supported programme, higher international oil prices are directly reflected in domestic fuel prices.

The resulting increase in transport and energy costs can feed through to the prices of goods and services, putting further pressure on household incomes and purchasing power.