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9 Jun, 2008 03:16

Economists divided over Russian inflation cause

Debate is raging within Russia and abroad about what’s causing high inflation, with some economists blaming the politicisation of the country’s Central Bank. Inflation in Russia has been officially forecast to hit 10.5% this year, although international b

Vladimir Putin has appeared on national television, ordering the head of the Central Bank, Sergey Ignatyev, to target the exchange rate.

However, a Professor of the New Economic School, Oleg Zamulin, says that is inconceivable in any developed country that successfully maintains a low inflation rate.

“So while the Central Bank has multiple goals and no clear announced monetary policy programme, it's impossible to defeat inflation,” he said.

Experts say businessmen and politicians are making the Central Bank buy up foreign currency to keep the ruble weak and competitive for Russian products. The problem is that long-term, exchange rate control is an expensive, and doomed, battle. Even worse it actually undermines the issue the Bank needs to focus on: price inflation.

The International Monetary Fund and the World Bank both believe that Russia’s inflation could reach 14% this year.

Paul Tomsen, the head of the IMF in Russia, told RT it was clear Russia’s monetary policy must be geared towards reducing inflation. However, the expert admitted there were concerns about the pace of appreciation that is “caused by the factors outside the control of the Central Bank”. “Central Bank independence is key,” he said.

Russia’s Finance minister Alexey Kudrin said the Bank must both uphold the stable national currency as well as fight inflation. And he insisted it is de facto independent. “The Central Bank is part of the government, but its independence is enshrined in the Constitution,” the minister said.

Sergey Ignateyev has said he may allow a slight ruble appreciation within months. Economists believe to get inflation down to single digits, the ruble would need to appreciate by some 20%.