Russian Money Supply's `Rapid' Growth May Fuel Inflation, Citigroup Says

Russia’s money supply continued its “rapid” expansion last month, threatening to sustain fast inflation through next year, Citigroup Inc. said.

Money supply growth of more than 30 percent in September is set to push up annual inflation to 9.2 percent at the end of the year and 7.6 percent in 2011, Moscow-based economists Elina Ribakova and Natalia Novikova wrote in a research note today.

“Growing producer costs and the acceleration of money supply growth will add to inflationary pressures from the end of 2010 and into 2011,” the note said. “However, we expect the central bank will remain under pressure not to increase rates in order to support a greater issuance of government bonds.”

Inflation accelerated for a second month in September to 7 percent after the country’s worst drought in at least half a century hobbled agricultural output and pushed up food prices. The central bank left its main interest rates unchanged last month, saying “inflationary risks, shaped by monetary conditions, are at an acceptable level.”

Money supply expanded at an annual rate of more than 30 percent every month for the past seven months, rising 31.2 percent in September, according to Bank Rossii data. The ruble weakened 0.6 percent to 30.57 versus the dollar at 10:51 am in Moscow today.

“We are concerned that, without a significant appreciation, pressure on the ruble and a weak interest rate transmission mechanism, inflation will remain elevated in 2011,” Ribakova and Novikova said.

To contact the reporters on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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