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Sri Lanka Inflation Slows to Lowest Level in More Than Two Years

Sri Lankan inflation slowed in January to a 26-month low, giving the central bank scope to shield economic growth by leaving interest rates unchanged.

Consumer prices in the capital, Colombo, increased 3.8 percent from a year earlier after gaining 4.9 percent in December, the Department of Census and Statistics said on its website today. The median of seven estimates in a Bloomberg News survey was for a 4.7 percent advance.

Sri Lanka has left interest rates unchanged since the beginning of February 2011 to aid domestic spending and devalued its currency in November to boost exports. Demand for credit has curbed scope to lower borrowing costs, central bank Governor Ajith Nivard Cabraal signaled today, contrasting with neighbors from Indonesia to China that have eased monetary policy in recent months as Europe’s debt crisis hurts the global economy.

“We don’t have room like the rest of the region to ease monetary policy as there’s already demand pressure with credit growth still strong,” Sanjeewa Fernando, an analyst at CT Smith Stockbrokers Pvt. in Colombo, said before the report. “Keeping rates on hold is the best option for inflation and growth.”

The $50 billion economy can achieve 8 percent growth in 2012, Cabraal said today. Sri Lanka’s 3 percent rupee depreciation was a one-off move, he also said.

Expansion has rebounded since the end of a 26-year civil war in May 2009, boosted by the development of roads and ports, tourism, foreign investment and consumer demand.

Inflation will probably remain around the “mid-single digit” level in 2012, the central bank said this month. The next monetary policy announcement is scheduled for Feb. 9.

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