Agro Perspectiva

IMF warns Russia of a potential overheating, urging to manage domestic demand

08.08.2012 09:26 "Agro Perspectiva" (Kyiv) — The International Monetary Fund (IMF) warned Russia of overheating, pointing to a rapidly growing demand, which purportedly exceeds potential output. The organization advocated for a tougher budget and tighter monetary policy to cap soaring inflation. The remarks came out last week as consumer price growth in the county accelerated for the second month in a row in July. The Federal Statistics Service announced on Friday that the annual headline inflation rate jumped to 5.6% from 4.3% in June. These dynamics highlight worries that Russia’s consumer price growth will exceed 6% in 2012, putting the Central Bank’s pledge to keep the target range of 5–6% in danger. HSBC speculated that the limit set by the government could be discarded already, if the pace of inflation persists. IMF mission chief for Russia Antonio Spilimbergo stressed that the government should do more to improve macroeconomic stability in the country. In an interview with the IMF Survey, the official noted that Russia is still exposed to future shocks, especially as the global economic outlook remains uncertain. Tapping inflation would boost Russia’s resilience to external volatility, and help the economy weather any turbulence. The current consumer price growth in Russia is largely driven by two factors: a one-off increase in regulated household utility prices and poor harvests in a handful of regions. The effect of the former came as no surprise to the market, while the impact of the latter has further strained the country’s overburdened economy. Reuters reported that VTB’s Maxim Oreshkin calculated the rise in utility tariffs, which directly added around 0.5% to headline inflation in July, with higher food prices supplementing yet another 0.25%. Presently, the Central Bank is wading under pressure to raise interest rates in the third quarter to bridle consumer price growth. However, some experts including Ivan Chakorov, chief economist for Russia and CIS at Moscow-based Renaissance Capital, argue that the country’s financial regulator does not have to pursue tighter monetary policy because of food inflation. Over the phone Chakarov commented by saying, «that according to economic theory, the Central Bank should not be raising rates to fight inflation when inflation is driven not by an overheated economy, but when it’s driven by the supply side temporary food-related shocks.» Chakarov not only questioned the necessity of a third quarter rates hike, but also brushed off the general notion that Russia’s surging demand is outstripping the potential output. «I actually disagree with the IMF. I really disagree that the economy is overheating, as this is not 2007 or the first half of 2008, when the economy was growing at 7%. Now the economy is growing at around 4%, so I think, it is difficult to claim that the economy is overheating,» Chakarov said, adding that, «in fact, based on our estimates, the economy contracted in the second quarter of this year, on a quarterly basis. This is an indication that the economy will be slowing down, and actually has started to slow down already.»