• Yudaeva says 15-20 years of meeting inflation goals is needed
  • Russian inflation expecations high even as price growth slows

Maybe the next generation of Russians will enjoy the fruits of the central bank’s fight against inflation.

Fifteen to 20 years of meeting its price-growth targets is needed to match the credibility of the European Central Bank, according to Ksenia Yudaeva, a first deputy governor at the Bank of Russia. While blindsided in the past two years by shocks including a currency collapse, an oil slump and restrictions on food imports, the chief economic forecaster at the central bank says one of the biggest long-term risks to its inflation goal is an outlook shared by a population accustomed to years of elevated price growth.

“People and companies have to believe us once and for all and change their behavior,” Yudaeva, 45, said in an interview in Moscow. “That’s why we are carrying out quite a tight policy, which is pushing people and businesses toward the conduct needed for reducing inflation.”

Getting a grip on prices has frustrated the Bank of Russia since it joined the ranks of policy makers targeting inflation more than a year ago, taking an approach pioneered by the Reserve Bank of New Zealand a quarter century ago. After missing their target in 2015 for a fourth straight year, Russian rate setters conceded for the first time last month that inflation may “deviate” from their 4 percent goal in late 2017 after turmoil in the oil market and the ruble.

Missing Goalposts

Its less-than-stellar run is something the Bank of Russia already shares with the ECB, which is set to miss its inflation target for a fourth year in 2016. While the dilemma for policy makers in Frankfurt is the opposite -- how to rekindle price growth to just under 2 percent -- President Mario Draghi last month said the ECB’s credibility hinges on fulfilling its inflation mandate and “it can’t just move the goalposts when it misses it.”

The Bank of Russia is in a bind because inflation expectations rose to an almost one-year high in January, the same month that headline price growth eased to the slowest since November 2014. More than half of respondents in a Levada Center poll published this month identified inflation alone as the biggest threat to Russia.

“Since inflation expectations are unanchored, non-monetary shocks spread to a wide range of prices,” Yudaeva said. “That’s why the central bank is forced to react even to one-time shocks.”

Tightening Ahead?

While warning it may tighten monetary policy if inflation risks intensify, the central bank predicts the index will slip below 7 percent as early as next January from 9.8 percent last month. It held its benchmark rate at 11 percent for a fourth meeting last month.

If weaning Russians off their fixation on rapid price growth is harder than it sounds, that’s because memories linger of hyperinflation that peaked at more than 2,500 percent in 1992 and wiped out savings in the wake of the Soviet collapse. In modern Russian history, the annual price index was below 4 percent for only four months in 2012, when authorities pushed back annual increases in utility tariffs.

Yudaeva, who has a PhD in economics from the Massachusetts Institute of Technology, finds reason for optimism by digging deeper into the past. Under the Soviet planned economy, prices didn’t change, meaning fear of inflation is far from ingrained and inflation expectations can be brought down, according to Yudaeva.

‘New Balance’

Now the economy must find a “new balance” for a decisive shift in expectations, she said. Yudaeva, who until a year ago was Governor Elvira Nabiullina’s first deputy in charge of monetary policy, said uncertainty surrounding the budget presents a threat to prices in the medium term.

“Everything else being equal, tighter fiscal policy allows inflation targets to be met with the help of more relaxed monetary policy, and vice versa,” she said.

Current risks to lowering inflation expectations include the exchange rate and “sharp” changes in state-regulated tariffs, she said. If adjustments in tariffs assume inflation at 4 percent, the central bank’s goal will be easier to reach, according to Yudaeva.

“The presence of non-monetary factors complicates the process of reducing inflation expectations and lengthens it,” she said. “If we coordinate our actions, it will be possible to reach the inflation target faster and maybe with a looser monetary policy.”

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