Russia Questions Inflation Goals Derided as `Numerical Fetishes'

  • Government forecasts show inflation overshooting target of 4%
  • Central bank set for longer rate halt on risks, economists say

President Vladimir Putin’s government may have just given Bank of Russia Governor Elvira Nabiullina the ammunition she needs to hold interest rates for longer.

Economy Ministry forecasts, backed by the government last week, show inflation won’t slow to 4 percent until 2019, two years later than targeted by policy makers. That will strengthen the central bank’s resolve to stand pat, according to Alfa Bank and Goldman Sachs Group Inc. The Bank of Russia, which most economists predict will leave its benchmark unchanged at a meeting on Friday, already warned last month that its “moderately tight” policy may last longer than previously planned after a pause since July.

“Rather than this being an expression of distrust in the central bank’s aim to bring inflation to 4 percent, it’s a support to the central bank,” Goldman Sachs economist Clemens Grafe said by phone. “The central bank’s main concern is political pressure -- basically that it has to loosen monetary policy too quickly -- so it gives them the argument not to do so.”

At stake is the credibility of a central bank that’s missed its inflation target in 2015 for a fourth straight year and already conceded the goal is at risk for 2017 after turmoil in the oil market and the ruble. Previously hemmed in by broader inflation expectations, policy makers may have little choice but to double down in the face of a government outlook that one minister openly said is putting the economy ahead of inflation.

‘Numerical Fetishes’

Alongside a budget deficit target of 3 percent of gross domestic product, the 4 percent goal for inflation amounts to “simple solutions in the form of numerical fetishes,” Economy Minister Alexei Ulyukayev said on Tuesday.

“We don’t need simple solutions -- we need complex and smart economic policy,” Ulyukayev said at his ministry’s annual meeting in Moscow.

After the crisis in Ukraine erupted more than two years ago, the Bank of Russia zeroed in on 2017 for achieving 4 percent inflation, with a subsequent aim of keeping it near that mark. While higher than the level targeted by other central banks, it’s a goal appropriate for Russia because it allows for price changes amid a “structural overhaul” of the economy while remaining low enough to bolster investment, according to Nabiullina.

‘Unacceptable’ Level

The governor, who’s said that in the short term the central bank won’t target inflation at any cost, warned last week that price growth risks stalling at 6 percent to 7 percent after slowing for seven months, a level she called “unacceptable” for speeding up the economy. Annual inflation is currently running at 7.2 percent, near the slowest since early 2014, and next year’s target is “realistic,” she said.

With the economy in recession for a second year, the central bank has kept the key rate at 11 percent after five reductions in 2015 as inflation expectations remain high. Only five of 29 economists surveyed by Bloomberg predict a 50 basis-point decrease on Friday, with the rest seeing no change.

The central bank’s caution is reverberating in the market. The ruble strengthened with oil on speculation the central bank will refrain from easing. The currency advanced 0.4 percent against the dollar to 66.3170 as of 1:35 p.m. in Moscow, extending its appreciation this year to 11 percent, the best performance among its developing-nation peers after the Brazilian real.

Russian government bonds dropped for three days before gaining on Tuesday. The yield on the five-year note slipped two basis points to 9.3 percent.

Government Unbelievers

“If the government is now doubting that we will have inflation at 4 percent in 2017, with the key rate at 11 percent, then all the more reason for the rate to stay unchanged until the government would believe,” said Natalia Orlova, chief economist at Alfa Bank in Moscow. “The Economy Ministry’s forecast looks like they are assuming that budget policy will be supporting demand through social payments.”

Russia has delayed amending this year’s budget, still based on an average oil price of $50 a barrel. That’s the fourth-highest assumption among the biggest crude producers after Bahrain, Norway and Ghana, according to Oxford Economics Ltd.

Changes to the fiscal plan will probably be considered this fall, according to Ulyukayev. In recent weeks, the central bank has increasingly singled out the budget as a source of risks for its inflation outlook.

‘Joint’ Targets?

While Finance Minister Anton Siluanov said the government and the central bank need to formulate “joint” inflation targets, that’s not a view shared by other cabinet members. Ulyukayev, whose ministry oversees official forecasting, said last week that GDP growth is a priority for the government, and the resulting inflation follows from its chief target, Interfax reported.

That won’t sit well with the central bank. First Deputy Governor Ksenia Yudaeva has said Russian policy makers will need to meet their inflation targets for 15 to 20 years to match the credibility of the European Central Bank, a tall task in a country vulnerable to shocks from abroad.

“Economic growth is likely to remain of secondary importance to the Russian central bank,” said Eldar Vakhitov, an economist at BNP Paribas SA in London. It “remains convinced that interest rates are now a function of inflation, rather than economic growth, and that lowering rates under current conditions would not lead to higher growth, but higher inflation.”

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