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. Last Updated: 07/27/2016

Ministries Put Forward Anti-Inflation Measures

A 1 percent rise in Russian consumer prices in the first 9 days of 2007 has prompted policy makers to propose urgent anti-inflation measures, creating new uncertainty over the ruble's exchange-rate outlook.

A document prepared by the economic, industry and finance ministries, the Central Bank and the financial markets watchdog, said 49 percent money supply growth in 2006 was the main driver of monthly inflation that was expected to reach 2.2 percent in January.

"Despite growing demand for money, the acceleration of money supply growth contributes to rising inflationary pressures in the economy, increasing the risks to achieving the inflation target in 2007," said the document, obtained Tuesday.

Inflation is closely watched by investors looking for clues on the next move on the ruble exchange rate, the most effective tool the Central Bank has against price growth.

"Demand for dollars exceeds supply at the moment as a result of capital outflows and short dollar positions closing. We've not seen the Central Bank on the market," said Sergei Romanchuk, a trader at Metalloinvest Bank.

Immediate measures aimed at combating inflation include a plan to issue more Central Bank bills to sell to banks to mop up money market liquidity, as the $89 billion stabilization fund loses some of its sterilization power due to a lower oil price.

"The Cabinet reaction, to put it mildly, has come too late," said Trust Bank analyst Yevgeny Nadorshin, pointing to the country's persistently high money supply growth.

Russia attracts big foreign exchange inflows, and with too much cash sloshing around in the economy the Central Bank cannot fight inflation -- which ended 2006 at 9 percent -- by raising interest rates.

The document calls for a discussion on diverting some of Gazprom's profits to repaying its foreign debts that contribute to currency inflows, a move backed by Finance Minister Alexei Kudrin.

It also said lower oil prices would help the Cabinet tame inflation. Analysts noted that this meant the Central Bank was now less likely to allow the ruble to appreciate. The government targets 6.5 percent to 8 percent annual inflation in 2007.

"We forecast 3 percent nominal appreciation against the basket in the first quarter of 2007 but I am more nervous about this forecast and the reason is the lower oil price," said Rory MacFarquhar, emerging markets economist at Goldman Sachs.

The document urged the Cabinet to let the Central Bank issue a new series of its OBR "beaver" bills with an option to sell after one year, and to issue more OBR bills with a six-month put option.

The Central Bank's interest rates currently range from 2 percent on overnight deposits, in line with money market rates, to the 11 percent refinancing rate at which banks can borrow from the Central Bank.

When there is a temporary liquidity squeeze, the bank lends money to banks at around 6 percent via repo auctions, accepting government and some corporate ruble paper as collateral.