Russia’s central bank chairman signaled policy makers may embark on an easing cycle for the first time in almost two years as a slowdown in inflation opens the door to measured interest-rates cuts.
“As inflation slows, the central bank may begin a gradual reduction in interest rates on its operations,” Elvira Nabiullina said in an interview with the state-run Itar-Tass news service published yesterday. “Low inflation is one of the elements of a favorable investment climate. So the central bank’s task is to provide for low inflation.”
Nabiullina, 49, who took over as central bank chairman in June, is grappling with the worst economic slowdown since Russia’s 2009 recession, compounded by inflation that has remained above this year’s target for 11 months. The deceleration in growth is primarily driven by domestic factors, and is related to underlying issues with the economy rather than fluctuations in the business cycle, she said.
The bank left its main lending rates unchanged for an 11th month on Aug. 9 with inflation above its target range of 5 percent to 6 percent. Cutting rates raises risks of faster inflation as well as capital outflows, according to Nabiullina. The Economy Ministry’s estimate for 2013 net private capital outflows of $70 billion to $75 billion is close to the central bank’s forecast, she said.
“The situation is very difficult and the decline in economic growth is a concerning trend,” Nabiullina said. While relaxing monetary policy may “ease the pain” in the short term, it wouldn’t help bolster growth in the longer run.
The Economy Ministry downgraded its forecast for this year’s growth rate to 1.8 percent, compared with a 2.4 percent projection in April, Deputy Economy Minister Andrei Klepach said last month. Gross domestic product expanded 1.2 percent from a year earlier in the second quarter, extending the slowdown to 1 1/2 years.
Analysts are almost evenly divided over whether Bank Rossii will cut the overnight auction repurchase rate from 5.5 percent at its next meeting, with 10 forecasting no change, according to a Bloomberg survey of 19 economists. The rest predict a quarter-point cut at the monetary-policy meeting scheduled for Sept. 13.
The three-month MosPrime rate, which large Moscow banks say the charge one another, may drop 19 basis points in the next three months, according to forward-rate agreements tracked by Bloomberg. That’s down from 56 basis points, or 0.56 percentage point, Aug. 19.
“There needs to be a low inflation rate, a low budget deficit, and low state debt levels,” Nabiullina said. “Those are the key indicators for macroeconomic stability, which create the conditions for economic growth.”
The comments were confirmed by phone yesterday by the bank’s spokeswoman, Anna Granik.
Russia is set to meet this year’s inflation target thanks in part to a favorable trend in food prices, she said. Price growth decelerated in July to an eight-month low of 6.5 percent from a year earlier.
The annual inflation rate eased to 6.4 percent in August, according to the median estimate of 22 economists in a Bloomberg survey. Consumer prices were probably unchanged from the previous month, according to the median of a second survey. The Federal Statistics Service in Moscow may report the data today or tomorrow.
The regulator plans to target a 4.5 percent level next year while allowing itself a tolerance range of 1.5 percentage points on either side, Nabiullina said. The middle of the range would drop to 4 percent in the following two years.
Those plans are dependent on the government following through with limits on tariff increases, she said. President Vladimir Putin told an investor forum in June that he planned to cap tariff growth for companies such as OAO Gazprom to the previous year’s inflation rate.
Russia’s government will have to be more careful with its spending as the economy grows more slowly, reducing budget revenue, Putin said in an interview with the Associated Press and Russian state television broadcaster Channel One, a transcript of which was posted on the Kremlin website today.
“I think that there will have to be some cutbacks somewhere,” Putin said. “Those proposals should come from the government as it works on the budget.”
Bank Rossii plans to continue moving toward a free floating ruble as it seeks to begin formal inflation targeting, according to Nabiullina.
“We’ll have to allow stronger fluctuations in the currency, but in my view, the benefits from that are greater,” she said.