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UPDATE 1-Sri Lanka Sept CPI at record low of 0.7 pct yr/yr

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COLOMBO, Aug 31 (Reuters) - Sri Lanka’s consumer prices slowed to a record low of 0.7 percent in September from a year earlier, from its previous record low of 0.9 percent in August due to lower food prices, government data showed on Wednesday.

Annual average inflation slowed to a near six-year low of 6.6 percent this month, from 8.5 percent in August. It has fallen 11 straight months after hitting a six-year high of 23.4 percent in October.

“This is mainly due to fall in rice prices,” D.C.A. Gunawardena, director at Department of Census and Statistics, which compile inflation data, told Reuters.

“Going forward, we expect consumer prices at 6 percent and 12-month moving average at 4 percent by December this year.”

Food accounts for more than 45 percent of the base weights of the inflation index.

“We believe inflation is bottoming out,” said Channa Amaratunge, director at CT Capital. “We expect consumer demand rising with interest rates falling and economic recovery is gradually picking up.”

Robert Prior Wandesforde, senior Asian economist at HSBC based in Singapore said the food-heavy headline inflation rate will move higher due to a combination of unhelfpul base effects and the lagging impact of higher international food prices.

A Reuters inflation survey <LK/INFL1> had expected the data to show consumer price inflation of 1.0 percent while annual average inflation was seen at 6.6 percent. [ID:nCOL448106].

The central bank cut its key policy rates by 50 basis points this month, resulting a sharp fall in yields of government securities, to compel commercial banks to increase private sector lending and spur economic growth.

The benchmark Treasury bill yield fell 22 basis points to a five-year low of 9.48 percent at a weekly auction on Wednesday.

The central bank has said consumer prices will rise to 5-6 percent by the end of 2009 and remain in single digits throughout 2010, saying renewed economic activity in the former war zone and post-war optimism will drive the island’s $40 billion economy.

The International Monetary Fund (IMF) on Sept. 22 raised Sri Lanka’s economic growth forecast for 2009 to the central bank’s minimum growth target of 3.5 percent. It predicted 3.0 percent when it approved a $2.6 billion loan to Sri Lanka in July. Economists have said consumer prices will rise on an expected increase in tax and energy prices as the government has agreed with the IMF to trim its fiscal deficit to 7 percent.

Sri Lanka’s economy grew at a four-year low of 6 percent in 2008, compared to 6.8 percent in 2007, due to the central bank’s inflation-busting policy of tightly controlling the money supply. (Editing by Bryson Hull)