Analysts Raise Ukraine 2008 Inflation Forecast To 21.6 Pct

KIEV, Ukraine -- Analysts sharply raised their forecasts for Ukraine's full-year inflation to a median of 21.6 percent from the previous 15.7 percent, after the highest monthly price jump since 1999 in March, according to a Reuters survey.

Inflation jumped 3.8 percent last month compared with February, bringing the cumulative increase in prices since the start of the year to 9.7 percent, exceeding a full-year government forecast of 9.6 percent.

The year-on-year inflation rate in March was 26.2 percent and, according to the eight analysts in the survey, probably rose to 29.6 percent last month. Inflation data for April are due to be published next week.

Prices started soaring in the second half of last year, largely due to a poor harvest which pushed up food prices -- some 60 percent of the consumer price index basket. Prime Minister Yulia Tymoshenko's government has also raised social spending, which analysts say has fuelled inflation.

"Consumer inflation is at a historical peak," said Serhiy Yagnych of UkrSibbank. "We expect a slower pace of price growth due to an anticipated good harvest, a stronger currency and the statistical effect of a growing comparison base."

"But due to the unprecedented price growth as seen in the first quarter full-year inflation is unlikely to be below 20 percent."

The central bank has let the hryvnia appreciate beyond its official band of 4.95-5.25 to the dollar in recent weeks, though its council has rejected a revaluation of the currency.

But central bank chairman Volodymyr Stelmakh has spoken of a revaluation in terms of fighting inflation. Earlier this month, he criticised generous government spending and warned of stagflation -- a combination of high inflation and slow economic growth.

"More price moves and a limited monetary policy will not have a positive impact on the economy. On the other hand, slowing down inflation will not be easy and for that reason we will see a period of continuing high level inflation in conditions of slower economic growth," said Vitaly Kravchuk, of the Institute for Economic Research and Political Consulting.

"Will it reach the extent of stagflation? That will depend on internal politics and external sentiment."

Analysts also lowered their full year economic growth forecast, partly due to the global credit crisis which may impact the local market and potential interest rate rises to fight inflation.

They now see economic growth at 6.0 percent compared with a previous forecast of 6.3 percent and against 7.6 percent last year. But they said the hryvnia's recent appreciation will not hit the export-driven economy.

"The current strengthening of the hryvnia on the interbank market does not have an essential impact on exporters because at the beginning of the year, prices for metals -- the main Ukrainian export -- rose more than the hryvnia's rate against the dollar," said Oleksander Zholyd, of the International Centre for Policy Studies.

Source: Guardian UK