Russia’s economic dynamics
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The governor of the Russian Central Bank warned that inflation will become a long-term phenomenon in the country, suggesting that the bank may continue its tough monetary policy stance.
In an interview with the Financial Times, Elvira Nabiullina said that the public’s concern about price spikes is the cause of the central bank’s concerns. She said that the sharp rise in food prices “weakened” the inflation expectations of ordinary Russians, and public opinion polls show that consumers predict that the inflation rate will be more than twice the annual figure expected by the central bank.
Inflation expectations have the risk of encouraging the public to hoard goods in response to inflation, but they actually push up prices. They also run the risk of triggering corporate salary increases and preemptive price increases.
The central bank has raised interest rates four times since March, including Increased by one percentage point In July.
Nabi Urina said: “We started targeting inflation later than many others. People did not have enough trust to understand that the central bank will always make the decision to get inflation back on track.”
Russia is one of the few emerging market countries, including Brazil, and their stance on inflation is lower than that of the Federal Reserve (the Fed has played down the risk of a “temporary surge” caused by the pandemic recovery) and other countries that keep interest rates lower.
After Russia cut interest rates to the lowest level ever to restart economic growth last year, Nabi Urina is seeking to control a new surge in inflation, which put the Kremlin into political dilemma before the parliamentary elections in September.
The central bank raised the main lending rate to 6.5% last week. The revised economic forecast forecasted an annual inflation rate of 5.7% to 6.2% in 2021, indicating that it may raise interest rates further later this year.
As the indicator continues to deviate from the central bank’s target, the newly predicted inflation rate is one percentage point higher than the previous forecast.
But public opinion polls show that after the prices of several major household goods began to soar last year, ordinary Russians expect the inflation rate to reach about 13.4%. Weak ruble, The demand for the country’s commodity exports surged and the economy recovered rapidly from the pandemic.
In the long economic recession since 2013, many Russians have fresh memories of rationing and high inflation. During this period, real income fell by 11%, and one in seven people lived below the poverty line.
“We have had high inflation for a long time [after Russia’s debt default] In the late 1990s and 2000s. Our people only live with low inflation for a short period of time,” Nabi Urina said. “When the situation is more stable, inflation expectations are more stable. .. But they are responding to the pandemic and rising prices. “
As a rare woman among the senior officials of President Vladimir Putin, since taking over the central bank in 2013, Nabi Urina has won worldwide praise for guiding the Russian economy through two financial crises.
When the fall in oil prices hit the ruble in 2014, she withstood the pressure to abandon her orthodox inflation targeting method, prompting her to convert the ruble to a freely floating exchange rate and raise interest rates to 17.5%.
This strategy was confirmed in 2017, when the inflation rate — peaking at 17% in her early tenure as governor — finally reached the 4% target set by the central bank.
With rising inflation, Russia temporarily restricted the prices of some staple foods and imposed export restrictions. “We think these are extreme measures and should be very short-term, because the most important thing is to expand production so that you can invest. For investment, you need predictable conditions, including tariffs, duties and taxes,” Nabiullina said .
“Say that you might freeze the price of a commodity may be the easiest thing to do. But we know there may be consequences,” the bank president added. “If the prices of daily and bulk commodities rise, then you need to increase social support measures for the most affected people.”
Putin promised cash grants in his annual State of the Union address in April, and millions of Russians will receive a boost in August, including a one-time payment of 10,000 rupees (US$137) to each child’s family.
Putin told economic officials this week that the Fed’s reluctance to target inflation is part of the reason for Russia’s rise, but he acknowledged that Moscow’s rapid abandonment of blockade measures also caused inflation to exceed the central bank’s expectations.
Nabiullina said that the central bank’s strict 4% target is itself a way to eradicate poverty. “As we know, inflation is a tax on poverty. The poor are the ones who suffer the most. Therefore, our policy of reducing inflation and stabilizing it at a low level aims to reduce the impact of inequality,” she said.
Nabiullina added that the central bank will study in September to further reduce the target to 2% or 3%, with a view to making a decision in mid-2022. She added that Russia’s monetary policy is unlikely to become neutral before 2023.
“We don’t think our current policy is tough,” Nabiullina said. “Deposit rates are lower than inflation, let alone inflation expectations. People think they are soft and not high enough to save.”