Russia 2008 Inflation May Accelerate to 14%, IMF Says (Update2)
By Alex Nicholson
June 2 (Bloomberg) -- Russian inflation may accelerate to 14 percent this year and the risk of the economy overheating is mounting, an International Monetary Fund official said.
Consumer prices rose an annual 14.3 percent in April, a five- year high, stoked by global food price increases and rising domestic wages. The economy grew 8 percent in the first quarter, the Economy Ministry said in a preliminary estimate on April 17. Gross domestic product rose 8.1 percent for all of 2007.
``The risk is that inflation gradually increases to such a level that it requires a sharp tightening of monetary policy that could cause a slowdown in growth,'' Poul Thomsen, head of the IMF mission in Russia, told reporters in Moscow today. The risk of the economy ``overheating'' is increasing, he said.
The economy may expand 7.8 percent this year because oil prices will remain high and the IMF doesn't expect any ``serious impact'' on Russia from global financial-market turmoil, Thomsen said. In 2007 inflation picked up to 11.9 percent, overshooting the government's target by more than three percentage points.
``If demand grows by 15 percent in real terms in an economy with potential growth of around 7 percent, you are rapidly using up what spare capacity is available out there and you will see growth of inflationary pressures,'' he said.
Increasing Risk
The government should re-focus monetary policy on controlling inflation by increasing the flexibility of the ruble's exchange rate, Thomsen said. Any delay may hurt growth, he said.
``Delaying a tightening now increases the risk that there will be the need for a more stronger monetary tightening in the future that could cause a period of below-potential GDP growth,'' Thomsen said.
Russia's central bank buys and sells rubles daily to manage the currency against the basket, which is made up of 0.55 dollars and 0.45 euros. On May 14, the bank said it will intervene at other unpublicized levels to reduce speculative interest in the currency and curb inflation. The bank may let the ruble rise this year, Chairman Sergey Ignatiev said on May 29.
Manufacturing expanded in May at the slowest pace since September amid accelerating inflation, a gauge of industrial production showed today.
The ruble fell against the dollar and the euro, leaving it at the weakest for four days versus its basket of currencies.
The currency slipped to 23.7508 per dollar by 10:54 a.m. in Moscow, from 23.6840 late on May 30. The ruble extended its 0.6 percent drop last week, the first since the beginning of May. The ruble decreased to 36.8627 per euro, from 36.8427 last week.