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5 Jul, 2007 21:12

Inflation rise puzzles analysts

Inflation in Russia went up in June by 1%. The monthly figure was three times higher than the same period last year. Analysts, however, disagree on the causes, remedies and future forecasts.

Russia's Central Bank attributes the recent hike to high capital inflows. They reached $US 67 BLN for the first half of the year compared to only $US 14 BLN the year before.

But USB Chief Economist Al Breach says the Central Bank policy is ultimately what determines the inflation level.

“The bottom line of why it has gone up so much in the last quarter essentially is because they are not allowing the rouble to appreciate as much as they need to keep inflation down. The government speared on really by business elites wants to keep the currency cheap,” he claims.

But other analysts disagree. Natalia Orlova of Alfa Bank says strengthening of the rouble is no longer in fashion.

“There are now less and less advocates of this theory. The simple reason is that in the past two years the Central Bank of Russia has been appreciating the rouble and it was successful in controlling inflation pressure just because of the ‘dedollarisation’ effect. In past two years Russia was really facing the dedollarisation of its banking system and of its savings. But now this effect seems to be over,” she believes.

Instead, Ms Orlova says the main reason for the rise in inflation was due to high fruit and vegetable prices. She thinks recent legislation banning foreign workers from food markets has also had an impact.

Al Breach, however, says food prices are not as important.

“One could talk about all the detail endlessly, but the bottom line is: you going to undervalue your currency unless the appreciation in real terms happens in one way or another. If it doesn’t happen in nominal terms, it will happen for inflation,” he says.

Ms Orlova, however, warns that a stronger rouble could lead to more capital inflows pushing inflation up.

Analysts are equally split on what the Central Bank's next step should be and what it actually will be.

“The Centeral Bank will tighten reserve requirements further. They will issue more rouble paper into the market and they will let the rouble to appreciate a little bit more,” Mr Breach suggests.

Ms Orlova, however, says the strengthening of the rouble will be minimal.

“The increase of reserve requirement as well as rouble appreciation per se will not be enough, and maybe in October or November we will see some discussion about the need to freeze gasoline prices,” she forecasts.

Alfa Bank predicts the annual inflation level will not exceed 8% – meeting the government's target. UBS estimates, however, come in at 8.5%.

Disagreements on the causes, remedies and forecasts of inflation reflect different schools of thought. But that does little to help the ordinary Russian hit by high prices.