Ukraine Cbank Eyes Hryvnia In Inflation Fight

MOSCOW, Russia -- Ukraine may use the hryvnia's exchange rate to fight inflation, which is threatening to exceed the official 2008 target of 9.6 percent by a wide margin, a senior central banker said on Thursday.

50 hryvnia ~ $10.00
Ihor Shumylo, executive director on economic issues at the central bank, also urged the new government of Prime Minister Yulia Tymoshenko to recognise inflation as a "serious foe" and take responsibility for targets together with the bank.

Inflation topped 16.6 percent in 2007.

"The issue of the liberalisation and use of instruments such as the exchange rate is being debated as part of a package of anti-inflation measures," Shumylo told Reuters.

He said a more stable political situation in Ukraine should help to balance supply and demand for foreign currency while capital inflows should remain strong due to the government's privatisation programme.

"Now the political situation has changed, there is a new government programme, we expect foreign direct investment at a level no less than last year, and the range of anti-inflation instruments should include the exchange rate," Shumylo said.

Ukraine went through several months of political instability before choosing a new prime minister after a tight finish in parliamentary elections last year.

The National Bank of Ukraine keeps the hryvnia within a corridor of 5.00-5.06 hryvnias per dollar by intervening on the forex market, but the country's monetary policy guidelines allow the bank to widen the corridor to 4.95-5.25 hryvnias per dollar.

SERIOUS FOE

Shumylo, interviewed on the sidelines of an investment conference in Moscow, said the central bank has estimates of the exchange rate's impact on inflation, but declined to elaborate.

The bank said 2008 inflation may reach 15 percent, much higher than a 9.6 percent target set by the previous cabinet. Officials have voiced dissatisfaction before at government targets that they say instil doubt in its economic policy.

Analysts are concerned inflation, fuelled last year by high food prices after a drought, would remain high as the government plans to spend $4 billion to compensate lost Soviet-era savings, a pre-election promise of Tymoshenko.

Standard & Poor's strongly criticised the government's "populist" approach to fiscal policy shortly after the first payments were made and the World Bank hiked its inflation forecast to 13.8 percent, saying it could raise it further.

Some analysts also doubted what motivation the central bank could have for taking greater responsibility through currency liberalisation if the government spending programme did not take inflationary consequences into account.

Shumylo said the new government should recognise inflation as a "serious foe" and take responsibility together with the bank.

"Now the key task is to set a joint inflation target which would both be realistic and which would be a responsibility of both the central bank and the government," he said.

The government should lower its 6.5-6.8 economic growth forecast for 2008 by one percentage point to accommodate anti-inflation measures and spending should be kept at levels set in the budget regardless of future inflation, he said.

This was an apparent retort to presidential office comments suggesting that social spending should be increased to maintain the real value of proposed benefits if the budget's inflation forecast runs out to be too low.

Shumylo said he expected inflation to spike in the first quarter of 2008 due to low comparison rates at the start of 2007 and even exceed last year's disappointing number.

"The 12-month inflation rate may even be higher than last year's in the first 3-4 months of 2008," Shumylo said. "But towards the end of the year the trend should fall."

Source: Guardian Unlimited