Russia posts 4.0% growth, along with rising prices

Russia on Friday reported strong annualised growth of 4.0 percent while also signalling an imminent interest rate hike aimed at keeping one of Europe's strongest economies from overheating. The state statistics committee's preliminary second quarter assessment was in line with analyst expectations following a surprise 4.9 percent jump in gross domestic product between January and March. Russia's economy expanded by 4.3 percent last year while at the same time recording a post-Soviet low annual inflation rate of 6.1 percent. The energy export-driven economy achieved this performance in the face of global market turmoil thanks to strong consumer demand and a relatively healthy financial sector that has limited borrowings from troubled European banks. The International Monetary Fund now forecasts 4.0 percent growth for Russia for the year -- an impressive figure considering third quarter recession expectation in European powers such as France. But policy makers now worry that rising global food prices and a steep jump in utility tariffs that had been delayed until after President Vladimir Putin's May return to the Kremlin will keep inflation expectations high. Russia reported a 5.3 percent annual inflation rate earlier this week that exceeds last year's pace and threatens to undermine Putin's election vow to keep the era of runaway post-Soviet prices a distant memory. The central bank on Friday decided to leave the main refinancing rate unchanged at eight percent, citing "the uncertain foreign economic situation." Economists however saw a hike coming within a matter of months after the bank removed a key sentence in its statement referring to current rate levels being appropriate in the short term. Most analysts agreed that this meant the bank was also growing concerned about inflation and preparing to move the key policy rates up by between 0.25 and 0.50 percentage points. "We see the central bank implementing a new round of monetary policy tightening in September-October," Moscow's VTB Capital investment bank told its clients. "We think that the central bank needs to take bold steps in order to preserve credibility and anchor inflation expectations." The comments echo a similar warning from the IMF following its directors' annual fact-finding mission to Moscow. Fund directors "generally recommended a gradual further tightening of monetary policy to contain underlying pressures and anchor (inflation) expectations," the IMF said in statement at the start of the month.