Bank of Russia Says Rate Cuts No Sign of Altering Priorities

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The Bank of Russia isn’t backtracking on its priority of fighting inflation after two interest-rate cuts this year, a central banker said.

“The reduction of the key rate doesn’t mean the task of lowering inflation in the medium term is abandoned,” Igor Dmitriev, head of the central bank’s monetary policy department, said at a conference in Moscow on Wednesday. “Long-term monetary policy priorities aren’t changing. What’s changing are the conditions in which we are carrying them out.”

After raising rates six times in 2014, in part to prop up the ruble following U.S. and European sanctions over Ukraine and tumbling oil prices, the central bank shifted to easing in January to relieve pressure on the economy. The surprise turn has raised concern that rate setters are caving in to political pressure and compromising on their inflation goal.

The easing cycle, in which the central bank has cut the benchmark to 14 percent from 17 percent in December, comes as March inflation accelerated to the highest since 2002 and the economy slides into its first recession in six years. Governor Elvira Nabiullina said the bank will reduce rates further if inflation risks continue to abate, while Dmitriev dismissed concern that price growth may become less central to the bank’s monetary approach.

Policy Justified

Andrey Klepach, chief economist at Russian state development lender Vnesheconombank and a former deputy economy minister, called for a review of the bank’s inflation targeting and said policy makers shouldn’t use that as their only goal. The Russian economy is exposed to significant shocks and volatility, and last year’s rate increases were “destructive,” he said.

Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said the bank had abandoned a previous approach based on economic fundamentals.

“The central bank is following political pressure, not the economic conditions that they used to follow before,” Miklashevsky said in e-mailed comments. “There’s a clear U-turn in their targets.”

Stabilizing Policy

The Russian currency’s worst crisis since 1998 sparked record capital outflow of $151.5 billion last year and ignited inflation already fueled by a food-import ban imposed by President Vladimir Putin in retaliation to EU and U.S. sanctions.

Raising interest rates from 5.5 percent in six moves last year stabilized the ruble, countered inflation and devaluation expectations, and helped ward off a “scenario of stagflation,” Nabiullina said Tuesday. The ruble has strengthened 12.8 percent this year, becoming the best performer among more than 170 currencies tracked by Bloomberg.

“The stronger ruble may mean a faster deceleration of inflation,” Deputy Finance Minister Maxim Oreshkin told reporters on Wednesday. “Consequently, it may give the central bank more flexibility in monetary policy.”

Inflation quickened to 16.9 percent from a year earlier last month, compared with 16.7 percent in February. Price growth will peak in the second quarter, according to Dmitriev, while Nabiullina said it will probably slow to about 9 percent next March.

The central bank’s rate decisions are guided by its medium-term outlook, Dmitriev said, adding that policy makers see a stabilization of inflation expectations. Gross domestic product will probably contract this year and next, he said.

“There’s now a more pronounced effect of cyclical factors, and the policy reaction to these events is largely justified,” Dmitriev said.

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