Ukraine's Inflation Expected to Make Up 10.5% in 2008
OREANDA-NEWS. January 15, 2008. If the authorities implement the necessary steps to curb price growth, inflation will go down from the current very high level, but will still remain in double digits, Dimitry Sologoub, Raiffeisen Bank Aval analyst, believes.
According to the forecast of Raiffeisen Bank Aval research department, inflation in 2008 will be at the level of 10.5%, higher than the government's official forecast (9.6%). In 2007 the Consumer Price Index (CPI) grew 16.6% (end-of-period) last year, reaching its highest level since 2000. Also, Ukraine had the highest inflation rate among all countries of Central and Eastern Europe in 2007 except Kazakhstan.
Both supply and demand factors have played a role in the inflation upsurge in 2007. On the supply side, poor harvest results due to adverse weather conditions caused a spike in food prices.
Cost-push inflation has been also driven by a very fast growth of the Production Prices Index (PPI) in both 2006 and 2007 (PPI grew 14.2% in 2006 and 23.2% in 2007), which then transfered to consumer prices.
Expansionary fiscal policy and loose monetary conditions were the main inflation drivers from the demand side. Specifically, fiscal expansion stimulated strong wage growth . as of end November 2007 nominal wages in the economy have risen by 37% in yoy terms. As a result, wage growth continues to outpace productivity gains, thus putting an upward pressure on prices. Another reason for high demand-pull inflation last year is rapid money supply growth (base and broad money grew 46% and 52% respectively in 2007). To maintain a fixed exchange rate in an environment of large capital inflows the National Bank was purchasing foreign exchange (FX), thus increasing the supply of the national currency.
The inflation upsurge in late 2007 will continue to affect the economy this year. Dimitry Sologoub said: "As inflationary expectations seem to get out of control we expect inflation rates to remain high at least in the first half of 2008."
Also, consumer prices could be affected with some lag by rapid PPI growth in 2007 and the increase of the import gas price by 38% (the latter will lead to an adjustment of gas tariffs for domestic consumers). Therefore, in the expert's opinion, fighting inflation is the main priority for policymakers at the moment. The package of antiinflationary policies should include a mix of fiscal and monetary measures.
Specifically, since the 2008 budget envisages a general government deficit of already about 3% of GDP, later supplementary budget should not include a further expansion of social spendings. Monetary policy is also to play an important role in fighting inflation in 2007. Greater exchange rate flexibility and the active use of NBU monetary instruments would help to tighten monetary conditions in the economy, thus reducing inflationary pressures.
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