OECD urges tighter monetary policy in Russia next year

Tue Nov 27, 2012 5:00am EST

* OECD says policy tightening may be needed in 2013 to boost credibility

* Sees GDP growth at 3.8 pct in 2013, up from 3.4 pct in 2012

* Election spending promises to cost 6 pct of GDP, risk overheating

PARIS, Nov 27 (Reuters) - Russia may have to raise interest rates and tighten rules on lending next year to crack down on inflation, the OECD said on Tuesday.

"More tightening will probably be required in 2013 to gain credibility in the run-up to a more formal inflation targeting regime," the Organisation for Economic Co-operation and Development said in its annual economic outlook.

Russia is gradually moving from a policy regime that targets the rouble's exchange rate towards that of inflation targeting, which involves tighter control of interest rates and a greater role for official inflation targets.

A rise in inflation above the central bank's formal 5-6 percent target range for 2012 led the bank to raise policy rates by 25 basis points in September, although a recent moderation in inflation has eased pressure for further imminent hikes.

While higher inflation mostly resulted from a poor harvest and a delayed increase in regulated prices, core inflation had also risen, suggesting that price pressures were feeding through into other sectors, the OECD said.

It forecast that the average monthly rate of consumer price inflation would rise to 6.4 percent in 2013 from 5 percent in 2012. But it expected that inflation would fall gradually towards the central bank's policy target of 4-5 percent in 2014.

While some economists are concerned that tighter monetary policy would exacerbate a deepening economic slowdown, the OECD was relatively optimistic about Russia's growth prospects.

It forecast that growth in gross domestic product would rebound to 3.8 percent in 2013 and 4.1 percent in 2014, from 3.4 percent this year. It anticipated higher oil prices, an easing of headwinds from the euro zone crisis and domestic consumption growth driven by low unemployment and rising real wages.

However, the OECD was concerned over the long-term impact of additional government spending promised by President Vladmir Putin, who won election for a third Kremlin term earlier this year.

"It is uncertain how electoral spending promises that amounted to a cumulative 6 percent of GDP by 2018 will be actually implemented, but they might contribute to overheating," the report warned.