Sri Lanka’s state-run Ceylon Petroleum Corporation hiked fuel prices in a response to galloping world crude oil prices as inflation accelerated for a fifth month in May.
Following the increase price of petrol at the pump will go up by 30 rupees to 157 rupees (1.47 dollars) whilst diesel will go up by 30 rupees to 110 rupees (1.02 dollars) per litre, the state-run monopoly fuel supplier said.
As a result of fuel price hikes, bus fares on the island were raised by as much as 27 percent on May 27.
This is the second time Sri Lanka has increased fuel prices this year. Last price hike was in January. Sri Lanka produces no oil and has been hit hard by soaring global crude prices, which have widened the trade gap and spurred 30 percent inflation in the 26 billion dollar economy.
Government efforts so far have failed to cool prices of food and fuel rising at the fastest pace in at least four years. Costlier military purchases to combat the separatist Tamil Tiger rebels have also fanned price gains.
Sri Lanka's 2008 inflation rate is likely to be ``significantly higher'' than previous estimates as oil price reaches record levels, the central bank said on May 26.
Consumer prices in the capital Colombo rose 26.2 percent from a year earlier, after increasing 25 percent in April, the statistics department said today. The median estimate of nine analysts in a Bloomberg survey was for a gain of 26.5 percent.
Governor Nivard Cabraal has kept borrowing costs at a six-year high to damp consumer spending and loan growth.
``A large part of the rise in inflation can be explained by surging international food and oil prices,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore.
``Strong demand at home, the result of past policy looseness, is allowing retailers to pass on that cost to consumers.''
Central Bank of Sri Lanka said last month it was revising down its 2008 quarterly targets for reserve money, or the currency in circulation and commercial banks' deposits at the central bank, which would help slow consumer-price gains by ``containing the demand-driven component of inflation.''
The authority has also kept monetary policy tight by reducing the amount of cash in the banking system and controlling credit demand.
``The central bank has been restricting reserve money growth in a meaningful manner since September last year, which should help cool domestic demand and temper inflation over time,'' said Sofat.
``The benefits may be limited in the near term on account of rapidly rising commodity prices.''
The central bank, which this week kept its key interest rate unchanged at 10.5 percent for the 15th straight meeting, may need to consider increasing the proportion of deposits that commercial lenders must place with it or let the currency appreciate to cool runaway inflation, according to Fitch Ratings.
