Bank of Russia Says Inflation Fight No Obstacle to Recovery Path

Russia’s central bank, which this month left its interest rates unchanged for the first time in 2015, said the goal of reaching its 4 percent medium-term inflation target poses no threat to the economy struggling to overcome its first recession since 2009.

“This goal is feasible and absolutely compatible -- and even complementary -- with the task of restoring sustainable economic growth,” First Deputy Governor Ksenia Yudaeva said Thursday at a conference in Moscow. “The economy’s adaptation to new conditions will be faster and more painless if monetary policy is accompanied by responsible fiscal policy.”

After blaming ruble depreciation for putting pressure on prices and forcing a pause in the easing cycle, the central bank is making a case that its stance on inflation is consistent with efforts to halt the economic slump. Yudaeva is also adding a voice to one of Russia’s most contentious budget debates in decades by calling for fiscal policy that’s in sync with the central bank’s goals.

Officials are seeking ways to cope with a collapse in oil prices that undercut the economy of the world’s largest energy exporter and led to the worst decline in living standards since President Vladimir Putin came to power 15 years ago. Facing the widest deficit in half a decade, the country has already dropped three-year budget planning and assumes oil averaging $50 a barrel in 2016, with a deficit under 3 percent.

Ruble Slump

The ruble was little changed at 66.4370 against the dollar as of 1:11 p.m. in Moscow. It’s the world’s second-worst performer against the U.S. currency in the past 12 months with a 43 percent drop, according to data compiled by Bloomberg.

The Bank of Russia has almost rolled back last year’s emergency rate increase with five cuts since January, shaving six percentage points off its benchmark. The economy of the world’s biggest energy exporter shrank 4.6 percent in the second quarter from a year earlier after a 2.2 drop in the first three months. The central bank forecasts an economic decline of 3.9 percent to 4.4 percent in 2015. 

The contraction may continue for several more quarters, according to Yudaeva.

“The transition to a floating exchange rate has already allowed the economy to speed up its initial adaptation to low commodity prices, becoming a key factor that enabled the balance of payments to adjust,” she said. “The difference between the emerging new model of economic growth from the previous one is in that growth will be based largely on internal rather than external sources of financial capital.”

To expedite Russia’s adjustment, the central bank is looking for fiscal policy that’s seeking to achieve medium-term stability and improve the efficiency of budget spending, according to Yudaeva. If the rate of increases in state-regulated tariffs is “consistent” with the Bank of Russia’s inflation targets, prices will be stabilized “faster and more painlessly,” she said.

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