EBRD raises E.Europe growth call, warns on inflation

By Dmitry Zhdannikov

KIEV, May 18 (Reuters) - The EBRD on Sunday raised its 2008 growth call for eastern European and former Soviet states to around 6 percent, citing their surprising resilience to global economic problems, but it warned inflation risks loomed.

"Inflation, now in double digits in many countries, is the region's most pressing current problem," the European Bank for Reconstruction and Development said in its economic outlook report, issued at its annual meeting in the Ukrainian capital.

"If left unaddressed, inflation could risk price-wage spirals, exchange rate re-alignments, or could force a belated and sharp response by monetary policy," the report said, highlighting a robust economic performance despite disruptions to the global economy from turmoil in international credit markets.

The bank, launched in 1991 to help the states of the former Soviet Union become fully functioning market economies, said in January it had cut its full year growth forecast for the region to 5.0-5.5 percent from 6.1 percent previously.

Although the multilateral lender has hiked its estimate of growth to "around 6 percent for this year", that still marks a slowdown from the 7.3 percent growth the commodity-rich region chalked up in 2007 as the global economy boomed.

The EBRD attributed the slowdown to several factors, but put soaring prices first among them.

"The anticipated slowdown reflects very rapid increases in consumer prices, which are likely to impact household incomes and consumption, especially in the CIS," it said, adding that the global credit crunch could start to bite in the region.

"A more restrictive international funding environment, together with interest rate rises to combat inflation, could reduce domestic credit growth and limit growth in domestic investment," the EBRD said.

"In addition, slowing global growth is expected to reduce import demand from key trading partners such as the countries in the euro zone." The EBRD said the international credit crunch had had only a limited impact on the region as banks had little exposure to structured assets linked to U.S. mortgages -- the slumping price of which has led to a lock-up in financial market liquidity.

But some countries such as Kazakhstan have suffered because banks have found it difficult to secure funds in international bond markets.

"The outlook for growth has deteriorated substantially in Kazakhstan where credit to the private sector is expected to stagnate in real terms this year," the EBRD said.

The Baltic and south-east Europe could also suffer from reduced capital flows amid heavy external financing needs.

Meanwhile the tightening of monetary policy and prudential regulations to combat inflation in the Baltics and Central Europe prompted the EBRD to revise down its 2008 growth forecast for those economies to 4.7 percent, down 0.5 percent from its forecast in November.

The south eastern Europe region is now seen growing at 5 percent over the year, compared with the 6 percent forecast in November. By contrast the bank's growth outlook for the CIS remains unchanged from November's call of 7 percent.

The EBRD called for supply side measures to be employed alongside macro economic policy moves to contain prices.