Inflation here to stay, the Russian central bank governor warns

Updates to the Russian economy

The governor of the Russian central bank warned that inflation is a long-term phenomenon in his country, noting that the bank will continue with its tough monetary policy stance.

Elvira Nabiullina told the Financial Times in an interview that the public’s fears about high prices lie behind the central bank’s concerns. The sharp rise in food prices had “de-anchored” inflation expectations from ordinary Russians, he said, with polls showing consumers predicting an increase of more than double the annual figure. provided by the central bank.

Inflation expectations carry the risk of encouraging the public to buy goods in an effort to beat inflation but thus actually increasing prices. They also run the risk of accumulating wage demands and rising price prospects from firms.

The central bank has responded by raising interest rates four times since March, including a increase of the full percentage point of July.

“We are starting to target inflation later than many others and the population is not confident enough to understand that the central bank will always make decisions to put inflation back on track,” Nabiullina said.

Russia is part of a small group of emerging market partners, including Brazil, that take a tougher stance on inflation than the Federal Reserve – which has downplayed the risk as a “transitional source” caused by the recovery from the pandemic – and other countries that are keeping rates low.

After Russia lowered interest rates to its lowest levels last year to restart economic growth, which came to a halt after its coronavirus blockade, Nabiullina seeks to curb further inflation growth which gave the Kremlin a headache politically ahead of the September parliamentary elections. .

The central bank raised its key lending rate to 6.5 per cent last week following a revised economic forecast which forecast an annual inflation rate of 5.7 to 6.2 per cent in 2021, indicating which could raise rates even later this year.

The projected new inflation rate is one percentage point higher than forecast before the measure continues to deviate from the central bank’s target.

But polls show that average Russians expect inflation to reach around 13.4 percent after the price of several key household products began to rise last year, fueled by a weak ruble, growing demand for the country’s raw material exports and a rapid economic recovery from the pandemic.

The records of rationing and high inflation are fresh for many Russians amid a long economic crisis since 2013, during which real incomes fell by 11% and a life in seven below the poverty line.

“We have had a very long period of high inflation [after Russia’s debt default] in the late 1990s and 2000s. Our people lived only under low inflation for very short periods of time, “said Nabiullina.” Inflation expectations were lower when conditions were more stable … but they reacted to the pandemic and high price increases ”.

Nabiullina, a rare woman among former President Vladimir Putin officials, has won worldwide applause for leading the Russian economy through two financial crises since taking over the central bank in 2013.

She resisted pressure to abandon her orthodox approach to targeting inflation when declining oil prices hit the ruble in 2014, prompting her to change the currency to a free float and raise interest rates until at 17.5 percent.

This strategy was revived in 2017, when inflation – which peaked at 17 per cent in his first years as governor – has finally reached the central bank’s target of 4 per cent.

A buyer loads bottled water in Kashira, near Moscow: polls show average Russians expect inflation to reach 13.4% © Andrey Rudakov / Bloomberg

As inflation rises, Russia has temporarily limited the price of some products and introduced export restrictions. “We believe these are extreme measures and should be in the short term, because the most important thing is to expand production in order to have investments. And for investment, you need conditions to be predictable, including customs, tariffs and the taxes, ”Nabiullina said.

“Saying you can freeze prices for one type of merchandise is probably the easiest thing to do. But we know there can be consequences,” the bank’s governor added. “If prices rise on everyday and mass assets, then you need to increase social support measures for the population groups that are most affected.”

Millions of Russians will receive a boost in August from the cash payments promised by Putin in his annual Union address in April, including a one-time payment of Rbs10,000 ($ 137) per child to families .

Putin told economic officials this week that the Federal Reserve’s reluctance to target inflation was partly responsible for Russia’s growth, but admitted that Moscow’s rapid abandonment of the blockade measures had also led to inflation beyond the expectations of the central bank.

Nabiullina said the central bank’s 4 per cent target was itself a way to fight poverty. “Inflation, as we know, is a tax on poverty. The poor are the ones who suffer the most. So our policy of reducing inflation and stabilizing it to low levels aims to reduce the effect of inequality, ”he said.

Nabiullina added that the central bank will consider reducing this target to 2 or 3 percent in September, with a view to taking a decision by mid-2022. Russia’s monetary policy is unlikely to remain neutral until 2023. , he added.

“We don’t think our policy now is faltering,” Nabiullina said. “Deposit rates are lower than inflation, no matter inflation expectations. People think it’s sweet and not high enough to save.”

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