• Bank of Russia governor sees grounds for `cautious optimism'
  • January GDP shrank 2.5% from year earlier, ministry estimates

Russia’s economy contracted at a slower pace in January and central bank Governor Elvira Nabiullina warned that inflation risks remain “high,” complicating the picture for policy makers in the weeks before they review interest rates.

Gross domestic product shrank 2.5 percent from a year earlier after a 3.5 percent plunge in December, the Economy Ministry said in a report on its website on Monday. Inflation expectations, a key gauge of future price growth, fell in February even as the ruble weakened, giving grounds for “cautious optimism,” Nabiullina was quoted as saying by Interfax in Shanghai.

“Inflation risks still remain high, although they haven’t grown recently,” Nabiullina said, according to Interfax. “Risks of a continuing economic downturn also remain, although January indicators show that the rate of decline has decreased.”

The central bank is reconsidering the balance of risks before its meeting on March 18 after warning in January that it may tighten monetary policy if inflation threats intensify amid turmoil in oil prices. Inflation expectations rose to an almost one-year high in January, the same month that headline price growth eased to 9.8 percent, the slowest since November 2014.

Inflation Goal

The Bank of Russia, which wants to bring annual inflation down to 4 percent by end-2017, has held its benchmark rate at 11 percent since July. The central bank will meet the target for price growth next year under its base-case scenario and can also reach the goal under its “risk” outlook should there be no additional inflationary shocks, according to Nabiullina.

Still, the likelihood of missing the target under the “risk” scenario, which assumes oil at $25 a barrel, “exists, and it isn’t small,” Nabiullina said.

The ruble has lost about 3 percent against the dollar this year, the worst performance among its peers in developing Europe. The currency’s weakness will add about 2.5 percentage points to inflation in 2016, Nabiullina was cited as saying by Interfax.

The central bank forecasts the economy will contract 1 percent to 3 percent this year, Nabiullina said. The first-quarter contraction is estimated at 1.7 percent to 2.5 percent from a year earlier, it said on Friday. The regulator will update its scenarios by the end of March, according to Nabiullina.

On a seasonally adjusted basis, GDP fell 0.1 percent in January after zero growth a month earlier, according to the Economy Ministry.

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