Above target inflation warrants rate hikes
Overview:
The economy has returned to growth but it remains weak and unbalanced. While exports are strong domestic demand remains very soft. The government is on track with its fiscal adjustment program and continues to win the support of the IMF. The current account deficit is relatively low. The immediate problem is high inflation which is likely to be above target both this year and next even when last year’s tax hikes drop out of the basis for calculation. The currency is stable and has even strengthened a bit this year. However, the inflation overshoot will force the central bank to consider hiking interest rates. The medium-term challenge continues to be reform of the public sector and state-owned enterprises. This would raise growth potential and improve the public finances but is strongly opposed by the trade unions.