Russia’s central bank assumed a “risky” stance by counting on the country’s accession to the World Trade Organization and the reduction of import tariffs to hold inflation within the target range, according to Alfa Bank.
“WTO entry, leading to a cut in import duties starting at the end of August, appears to be the core reason for the central bank’s optimism,” Natalia Orlova and Dmitry Dolgin, analysts in Moscow for the country’s biggest private lender, said in a research note today. “September price growth would need to shift to deflation to confirm the WTO’s positive impact on the inflation trend, which we see as unlikely.”
Bank Rossii is trying to deliver a second year of record-low inflation by holding the rate at 5 percent to 6 percent after capping price growth at 6.1 percent in 2011. Russia became the 156th member of the Geneva-based trade arbiter on Aug. 22 after completing almost two decades of negotiations.
Policy makers have refrained from raising interest rates, even as inflation started to accelerate in June because of rising grain prices and increases to utilities tariffs in July. The central bank is held “hostage” by the financial industry’s exposure to its funding, according to Alfa.
“An active increase in central bank refinancing support in June-July signals that bank funding is a higher priority than inflation,” Orlova and Dolgin said. Its “active role in funding the banking system is partly in conflict with its approach of inflation targeting.”
Economy Minister Andrei Belousov’s forecast that inflation will reach 7 percent is “confusing for the market and damaging for the central bank’s inflation-target ambitions,” according to Alfa. Policy makers are losing credibility by remaining silent on the diverging estimates, Orlova and Dolgin said.
“Even if the central bank’s target is not met, we believe the key is to communicate the reasons and a plan of action to the market,” they said. “The next policy rate meeting offers an ideal opportunity to signal the deterioration of the inflationary trend even if the central bank would still prefer to keep interest rates unchanged.”