Russia raises rates to battle inflation

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The Russian central bank raised its main interest rate by 0.25 basis points to 8.25 percent with effect from Tuesday to combat strong inflationary pressures which endanger a fragile recovery. The increase in the refinancing rate, announced on Friday, is the second such tightening in the current cycle after the central bank in February raised its rates for the first time in more than two years. The bank said that inflationary pressure in Russia remained “considerable” with inflation this year up to April 25 reaching 9.6 percent from the same period the year earlier. “The decision has been taken due to the continued high level of inflation expectations, higher than predicted inflation forecasts and also taking into account the affect the situation on global markets can have on Russia,” it said. Russia is emerging from the economic crisis that pushed it into recession two years ago but economists are concerned that persistently high inflation partly linked to a devastating heat wave last year could hamper the recovery.
The bank said Russia’s industrial production rose in March from February but its annual growth rate was down slightly on a year-on-year basis. While unemployment was falling, investment dynamics remained weak. It vowed that when considering further rate decisions the bank would take into account the tricky balance between keeping down inflation and also helping the economic recovery.
“The Bank of Russia will consider the corresponding risks of continued high inflation pressure and a slowing of economic growth, also taking into account the global economic situation,” it said. The Russian government under Prime Minister Vladimir Putin has in the last years worked hard to bring down the sky-high inflation which dogged the country after the collapse of the Soviet Union.
But inflation worries have returned in the last months after a summer heat wave and fires destroyed over a quarter of the harvest, creating price pressures as the supply of basic food items on shop shelves fell.
The Russian economic development ministry has forecast that inflation will be 7.0-7.5 percent in 2011 and Putin this month said the government expects the figure to be no higher than 6.5-7.5 percent.
But most analysts believe that the figure will overshoot this estimate, unless this year’s harvest surprises to the upside. Meanwhile, the recovery remains fragile with Russia still far off the stellar growth rates it saw before the 2008 economic crisis. Putin has said Russia is expecting growth of 4.2 percent in 2011 but economists have repeatedly warned the country risks becoming stuck with mediocre growth rates unless it implements much needed reform. Unlike neighbouring Belarus and Ukraine and some EU states Russia did not call on International Monetary Fund (IMF) help in the economic crisis and is running a much lower budget deficit than many of its European partners.
In a keynote address to parliament earlier this month that was seen by many as a campaign speech ahead of 2012 presidential elections, Putin took the credit for shepherding Russia through the crisis.
“I believe that it is our joint achievement that Russia – in this very difficult period of global crisis – managed to avoid serious shocks and risks,” he said.