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. Last Updated: 07/27/2016

Rising October Inflation Helps Strengthen Ruble

Inflation surged in October, data showed Friday, triggering a fresh market attack on the Central Bank's policy of curbing the ruble, and sending the currency to new 6 1/2-month highs.

With Russia the world's second-largest oil exporter, bumper oil revenues are good news for the budget. But they have also forced the Central Bank into intervening to buy dollars to stem ruble appreciation that could threaten competitiveness. The inflationary knock-on effects of printing rubles, a consequence of dollar-buying intervention, showed through in October's 1.1 percent monthly rise in consumer prices -- the biggest since January.

"CPI has started to feel the effects of the monetary authorities' myopic economic policy in the second and third quarters of this year," said Alexei Moisseyev, an economist at Renaissance Capital.

Rubles for "tomorrow" delivery Friday touched their highest since April 19 in official trade at 28.64 to the dollar, up 0.4 percent from Thursday's close. Dealers said the Central Bank had pulled back from an intervention level of 28.77 it defended in Thursday's session as ruble buyers piled in on market talk that the CPI number would be bad.

"This reinforces the argument that is in the air that the ruble should be allowed to strengthen in an effort to reduce inflationary expectations," said David Lubin, an HSBC economist in London.

Deputy Central Bank chairman Konstantin Korishchenko said the ruble was rising in the context of global dollar weakness, adding that high oil prices were frustrating attempts to meet a 10 percent inflation target this year.

Inflation from January to October was 9.3 percent, compared with 9.7 percent in the same period last year.

"Growth in the price of oil and other commodities caused huge swings in capital inflows and outflows experienced in Russia during this year, and that has a complicating impact on our task of achieving this inflation target," Korishchenko said in a telephone interview.

The Economic Development and Trade Ministry has said a best-case scenario would be 10.5 percent inflation for 2004. Analysts polled this week saw inflation at 11 percent in 2004, although some said the October number may push up the final outcome to 11.5 percent. Economists point to further reasons for accelerating CPI growth, including surging producer prices and increasing salaries in the public sector as the economy runs into capacity constraints after years of rapid growth.

"Higher CPI is a natural companion to economic growth," said Nikolai Kascheyev, head of treasury research at Vneshtorgbank. "We would blame the Central Bank of Russia less than some other factors."

Troika Dialog analyst Anton Struchenevsky said a mini-banking crisis this summer also had a knock-on effect as Russians were keener now to spend than save. "People have very clearly increased spending, trust in the banking system has sharply decreased. It is classic demand inflation," he said.