Updates on the Russian economy
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The governor of the central bank in Russia has warned that inflation will be a long-term phenomenon in her country, indicating that the bank is likely to continue with its strict monetary policy.
Elvira Nabiullina said in an interview with the Financial Times that the public fear of rising prices is behind the central bank’s concerns. Sharp rises in food prices have “unleashed” ordinary Russians’ inflation expectations, she said, with a poll showing consumers predicting a rise of more than double the central bank’s projected annual figure.
Inflation expectations carry the risk of encouraging the public to stockpile goods in an attempt to beat inflation, but in order to raise prices. They also run the risk of increasing wage increases and preventing price increases by businesses.
The central bank has responded by raising interest rates four times since March, including a full percentage point increase in July.
“We started targeting inflation later than many others and the population does not have enough confidence to understand that the central bank will always make decisions to get inflation back on track,” Nabiullina said.
Russia belongs to a small group of emerging market peers, including Brazil, which takes a tougher stance on inflation than the Federal Reserve – which has reduced the risk as a ‘short-lived increase’ caused by the recovery from the pandemic – and other countries that keep rates low.
After lowering interest rates to its lowest level last year to resume economic growth, which came to a halt after the closure of the coronavirus, Nabiullina wants a new rise in inflation that has given the Kremlin a political headache before the parliamentary elections in September.
The central bank last week raised its lending rate to 6.5 per cent after a revised economic forecast predicted an annual inflation rate of 5.7 to 6.2 per cent in 2021, suggesting it could raise interest rates even later this year.
The new forecast inflation rate is a percentage point higher than previously forecast, as the benchmark drifts away from the central bank’s target.
But the poll shows that ordinary Russians expect inflation to reach about 13.4 percent after the price of several major household goods began to rise last year, fueled by a weak rublea rising demand for the country’s exports of products and a rapid economic recovery from the pandemic.
Memories of rationing and high inflation are fresh for many Russians amid a long economic downturn since 2013, during which real incomes fell by 11 percent and one in seven lives below the poverty line.
‘We have experienced a very long period of high inflation [after Russia’s debt default] in the late 1990s and the 2000s. “Our people have only been living under low inflation for a very short time,” Nabiullina said. ‘Inflation expectations were more anchored when conditions were more stable. . . but they are responding to the pandemic and the high price increases. ”
Nabiullina, a rare woman among President Vladimir Putin’s senior officials, has won worldwide accolades for managing the Russian economy through two financial crises since taking over the central bank in 2013.
She resisted the pressure to abandon her orthodox approach to inflation when falling oil prices hit the ruble in 2014, leading her to change the currency to a free float and raise interest rates to 17.5 percent.
That strategy was confirmed in 2017, when inflation – which peaked at 17 percent in her early years as governor – finally reached the central bank’s target of 4 percent.
As inflation rose, Russia temporarily curtailed the price of some staples and imposed export restrictions. ‘We believe that these are extreme measures and should be very short-term, because the most important thing is to expand production so that you can invest. And for investment, you need conditions to be predictable, including customs, tariffs and taxes, ”said Nabiullina.
‘It’s probably easiest to say that you can freeze prices on one kind of thing. But we know that there can be consequences, ”the bank manager added. ‘As prices rise for everyday and large goods, you need to increase social support measures for the population groups most affected.
Millions of Russians will receive a boost in August from cash handouts promised by Putin in his annual speech in April, including a one-time payment of Rbs 10,000 ($ 137) per child to families.
Putin told economic officials this week that the Federal Reserve’s unwillingness to target inflation was partly responsible for the rise in Russia, but he acknowledged that Moscow’s rapid halt to shutdown measures had also driven inflation above central bank expectations.
Nabiullina said the central bank’s strict target of 4 percent is itself a way to combat poverty. ‘Inflation is, as we know, a tax on poverty. The poor are the people who suffer the most. “Our policy of lowering inflation and stabilizing it at low levels is aimed at reducing the effects of inequality,” she said.
The central bank will investigate lowering the target in September to 2 or 3 percent, Nabiullina added, with the aim of making a decision by mid-2022. Russia’s monetary policy is unlikely to be neutral until 2023, she added.
“We do not think our policy is false now,” Nabiullina said. ‘Deposit rates are lower than inflation, but note inflation expectations. People think they are soft and not tall enough to save. ”