Spectre of inflation return draws presidential attention

Fighting inflation was the first order of business for President Medvedev at a meeting devoted to economic issues on Tuesday, after prices rose by nearly 10% in January on an annualized basis.

­The Central Bank has already said it's ready to impose new measures to draw cash out of the economy to prevent it from overheating. This includes further raising bank reserve requirements. Its seeming reluctance to raise the key refinancing rate stems largely from the possibility that this would attract hot money to Russia to from low interest rate developed economies

Head of the Central bank, Sergei Ignatiev adjusted the banks inflation forecast to 6-7% by the end of the year, and indicated the central bank would continue using all the tools at its disposal to control bank reserve volumes.  He added that it would also continue to expand the floating exchange rate corridor against the currency basket.

Director at Center for Economic Studies of the Moscow Financial-Industrial academy, Sergey Moiseyev, noted that a subsidence of agriculture based food price pressures, and strong action by the central bank could tame inflation.

“Among all factors driving the inflation up is force-majeure conditions brought to us by weather, and a good harvest this year, which will slow the growth of food prices and even lead to their decline can slow down inflation. In this case, I admit that 11% inflation in May could slow to 8% by year end. Nevertheless, we should keep in mind that inflation is highly inertial and very sensitive but the result can not be seen immediately, which means it can not start decreasing sharply, after reaching 9.6% in January. I think, at least until May it will accelerate and reach about 11% year on year”

Moiseyev added that the Central Bank has been behind the curve in terms of addressing the inflationary threat and that other key drivers are likely to worsen before it can be brought under control.

“Another way to overcome inflation rising sharply could be tightening of monetary policy. This requires more decisive measures such as increasing rates of repurchase agreement (REPO) from the current 5% to 8.5-9%. But I do not think that the Central Bank is ready for such radical action, its policy and action are still behind the market. The Central Bank raises rates to a maximum of 0.25 percentage points per month, which inevitably means that to bring the rate down to 8.5%, it would take 14 months, and must accelerate rate hikes at least 1 percentage point a month. Among other drivers for inflation, capital inflow and M2 will worsen inflation following rates increases and speculative capital inflow with oil prices risk hurting the Economy.”