OREANDA-NEWS. On 10 April 2008 was announced, that according to Dimitry Sologoub, Head of Research Department in Raiffeisen Bank Aval, surging inflation may damage economic stability in Ukraine.

In the opinion of analyst, high inflation is eroding household incomes — people become poorer in real terms which increases social tensions in the society. Also, falling real incomes may lead to rising defaults on retail loans, thus increasing credit risks for the banking sector. Moreover, soaring inflation pushes lending interest rates upwards, which reduces access to credit and, in turn, negatively affects both investment and household consumption. Finally, high and volatile inflation is harming business planning by entrepreneurs, thus also hampering investment into the economy.

Besides, the analyst stressed that inflation projections are subject to large uncertainty, since in the environment of accelerating inflationary expectations the accuracy of forecasts tends to be very low.

The authorities are trying to reduce inflationary pressures in the economy by sticking to relatively tight fiscal (i.e. strictly rationing budget expenditures) and monetary (higher interest rates, active liquidity absorption operations) policies. But, the effectiveness of these measures in the short-run is limited. Also, the government resorted to administrative measures to curb prices growth such as introducing export quotas on sunflower oil and pushing largest retailers to freeze prices for the most important food items. However, historical evidence shows that administrative price controls are usually ineffective and spur inflationary expectations further.

At the same time, Dimitry Sologoub said that despite inflation disaster in the 1st quarter there is still a room for inflation abating later in the year. First, authorities’ efforts to curb prices growth are likely to give effect with some lag. Second, assuming a rich harvest and the absence of major supply or demand shocks on food markets, food prices will be growing much slower than last year thanks to a base effect.