Photographer: Andrey Rudakov/Bloomberg

Will Russia Be Able to Stay in Central Bank Heaven?

Factors that have helped the Bank of Russia close in on its inflation target may prove temporary


Bank of Russia Governor Elvira Nabiullina has almost achieved what many other central bankers are still dreaming of: reaching her inflation target.  

Of course Russia's policy makers, unlike the European Central Bank's, have been battling too-high inflation rather than price growth that is too low. She's faced plenty of hurdles beyond her control in closing in on her 4 percent goal, including a collapse in oil prices and international sanctions. There have also been tough choices in deciding to put the ruble into a free float, introducing inflation targeting and keeping a tight monetary stance in the face of public opposition.  

Over just two years that has brought inflation down from a 13-year high of nearly 17 percent. Now the challenge will be to keep it there. 

The main factor behind the high inflation Nabiullina faced was the ruble’s depreciation, according to Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow. It lost about half its value in 2014-15 and the waning effects of that slump is one of the major reasons prices are now under control, he said, alongside a contraction in demand, falling inflation expectations and a good harvest.

“No one had doubts that inflation would fall down from 17 percent, but we weren't convinced that it will decline so fast,” Kouzmin said. “The task of keeping inflation at the target is hard, but, still, less hard then getting there for the first time.”

Analysts in a Bloomberg survey now forecast consumer price growth will slow to 4 percent by the end of the year, after holding at 4.1 percent for a second month in May.

Part of the challenge will be to get consumers to believe in the target. Household inflation expectations for a year ahead were 10.3 percent in May, still more than twice the target. Preconceptions are hard to fight in Russia where people remember inflation of 2,500 percent in 1992. Consumer-price growth last slipped below 4 percent for four months in the beginning of 2012, prompted by a good harvest and a change in the timing of a tariff adjustment.

Even as the central bank draws closer to its goal, the ruble and strong harvest are temporary factors and their effects are abating, “slightly” stalling disinflation, First Deputy Governor Ksenia Yudaeva said Tuesday. Yet it’s “realistic” to expect consumer-price growth to reach 3.8 percent by year end, she said.

The final steps toward 4 percent could still prove to be slow and the level hard to maintain. Inflation may even temporarily speed up in coming month due to cold weather in spring, the central bank’s research and forecasting department wrote.

Officials have previously warned that volatility on global commodity markets will be the main source of inflationary risk. Russia gets about 40 percent of its revenue from oil. Brent crude is now seen at $45 a barrel in 2018, which implies “some ruble depreciation” and may push inflation back to 4.5 percent or 5 percent by the middle of next year, according to JPMorgan analyst Anatoliy Shal. 

For now though, Nabiullina says she opposes a faster pace of rate cuts as risks remain. The central bank's next policy announcement is due June 16 with 11 of 21 economists surveyed by Bloomberg forecasting a 25 basis point rate cut to 9 percent.

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