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31 Jan, 2008 15:32

Global strife complicates Russian inflation cuts

Russia's cabinet has been urgently looking at ways to reduce inflation this week, after the January figure of 2.4% smashed through the government's target. In 2007, inflation was 11.9% – well above the government's initial forecast of 7%.

Minimising inflation is now, more than ever, a major concern for the government.
The Ministry of Economic Development and Trade, together with the Finance Ministry, have worked out an anti-inflation program for 2008. The ministries have included in their proposed measures control on external debts, stimulation of savings, tight monetary policy, and stabilising the growth in consumer spending.

However, analysts doubt these proposals will be effective.

Analysts say the main government tool for fighting inflation has been rouble appreciation managed by the Central Bank but that this isn't likely to be taken much further, and is complicated by its role in ensuring the stability of Russia's banking system amidst global instability.

“Bank of Russia is reluctant to appreciate the national currency and increase rates and unfortunately – taking into account the current situation on the world financial market – it won't be easy for the Central Bank to change their policy,” believes macroeconomist Evgeny Nadorshin.

With massive capital inflows stemming from energy revenues driving increasing consumer spending, nobody is saying bringing inflation under control will be easy or done quickly. But in the longer term it will become an increasing drag on economic growth, as experts suggest a second wave of inflation may see things worsen in the short to medium term.