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2 Jun, 2008 08:18

Soaring inflation threatens economy

The head of the International Monetary Fund in Russia has said inflation could hit 14% this year. Paul Tomsen made his prediction after economic growth in May exceeded the government’s monthly forecast.

Government officials still insist they can hold annual inflation at 10.5%.

Russia’s consumer price index for May could possibly rise 1.4%, against the 1.2% forecast by the Russian authorities.

The government has consistently failed to meet its inflation targets since last year, when it injected an additional $US 40 billion into the budget.

However, Russia's Economy Ministry still hopes to keep annual inflation below its 10.5% target.

“Despite the fact that inflation growth rate is higher now than last year, we expect it to slow down due to lower food prices in the second half of the year,” said Andrey Klepach, Deputy Economic Development Minister.

Rising inflation has become a global phenomenon in recent months, after being kept under the cosh for many years. Germany’s annual inflation rate leapt to 3% this month, mainly driven by food prices.

Economists say Russia is even more vulnerable to this trend, as the proportion of foodstuffs in its consumer basket is three times higher than that in Europe.

But experts say it is not consumers who will suffer most. Rising inflation is pushing up the cost of borrowing for companies.

“Last year inflation was at a different rate, around 8% in the second quarter of the year and inflation expectations were lower. So companies were issuing multiple bonds according to 8% inflation. Now it is not the case as the inflation is double digit and companies do not borrow money. What does not surprise me is the investment activity in the private sector,” said Evgeny Gavrilenkov,Chief Economist of Troika Dialogue Group.

When inflation is high, people tend to stop saving and even start taking money from their deposits.

Economists warn that a shrinking deposit base and the necessity of borrowing more on the global markets may undermine the long-term stability of the banking sector.