Iraqi inflation falls to lowest in over 17 years

BAGHDAD (Reuters) - Annual inflation in Iraq has fallen dramatically, hitting 12 percent in December 2007, compared with 65 percent a year earlier, the central bank said in a statement seen on Monday.

"This positive and encouraging trend in the annual inflation levels has not been achieved in the country for more than 17 years," the bank said.

"This improvement ... if it continues, indicates a new course for monetary policy, a less strict one, in the coming period, but on condition that state expenditure maintains a high level of discipline," it said.

The central bank has pursued a policy of raising the value of the dinar against the dollar, helping to lower monthly inflation.

The dominance of the dollar has been a problem for the bank, which cannot curb inflation with traditional tools to control the domestic money supply as most of the country's commerce is handled in dollars.

In December it was forced to issue a statement denying it planned to revalue the dinar quickly after rumors of such a move sparked buying of the currency.

The International Monetary Fund forecast last week that high oil production would push Iraq's gross domestic product growth to over 7 percent in 2008 and 2009, from just 1.3 percent in 2007.

Iraq's economy has been battered by decades of war and sanctions that have fuelled high unemployment and low growth. But along with higher oil prices, business is booming in the country's more stable northern Kurdistan region.

(Writing by Ross Colvin, additional reporting by Inal Ersan in Dubai; editing by David Stamp)