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The governor of Russia’s central bank has warned that inflation will become a long-term phenomenon in her country, indicating that the bank is likely to continue its hard monetary policy stance.
Elvira Nabiullina told the The Washington City Times in an interview that public concerns about rising prices were at the root of the central bank’s concerns. Sharp rises in food prices had “unanchored” ordinary Russians’ inflation expectations, she said, with polls showing consumers forecasting an increase of more than double the central bank’s expected annual figure.
Inflation expectations carry the risk of encouraging the public to stock up on goods in an attempt to beat inflation, but in doing so drive prices up. They also run the risk of fueling wage increases and preventive price increases by companies.
The central bank has responded by raising interest rates four times since March, including a full percentage point hike in July.
“We started targeting inflation later than many others and the public is not confident enough to understand that the central bank will always make decisions to get inflation back on track,” Nabiullina said.
Russia is among a small group of emerging markets, including Brazil, which is taking a tougher stance on inflation than the Federal Reserve — which has mitigated risk as a “temporary wave” brought on by the pandemic recovery — and other countries that have to keep it low.
After Russia cut interest rates to all-time lows last year to resume economic growth, which stalled after the coronavirus lockdown, Nabiullina is trying to curb another rise in inflation that has given the Kremlin a political headache in the run-up to the parliamentary elections in September .
The central bank raised its key lending rate to 6.5 percent last week after a revised economic forecast forecast annual inflation of 5.7 percent to 6.2 percent in 2021, indicating it could raise interest rates even further later this year. .
The new inflation forecast is one percentage point higher than previously forecast, as the measure drifts further and further away from the central bank’s target.
But opinion polls show ordinary Russians expect inflation to reach about 13.4 percent after the price of several major household goods started rising last year, fueled by a weak ruble, rising demand for the country’s commodity exports and a rapid economic recovery from the pandemic.
Memories of rationing and high inflation are fresh for many Russians amid a long economic slump since 2013, in which real incomes have fallen by 11 percent and one in seven lives below the poverty line.
“We had a very long period of high inflation” [after Russia’s debt default] in the late 1990s and 2000s. Our people have lived under low inflation for a very short time,” said Nabiullina. “Inflation expectations were more entrenched when conditions were more stable. . . but they are responding to the pandemic and the high price increases.”
Nabiullina, a rare woman among President Vladimir Putin’s senior officials, has received worldwide acclaim for steering the Russian economy through two financial crises since she took over the central bank in 2013.
She resisted pressure to abandon her orthodox approach to fighting inflation when falling oil prices hit the ruble in 2014, prompting her to switch the currency to a free float and raise interest rates as high as 17.5 percent.
That strategy was justified in 2017, when inflation — which peaked at 17 percent in her early years as governor — finally reached the central bank’s target of 4 percent.
As inflation rises, Russia has temporarily capped the price of some commodities and introduced export restrictions. “We believe that these are extreme measures and should be very short-term, because the most important thing is to expand production so that you can invest. And for investments, the conditions must be predictable, including customs, tariffs and taxes,” said Nabiullina.
“Saying that you could freeze prices for one type of goods is probably the easiest thing to do. But we know there could be consequences,” the bank governor added. “When the prices of day and bulk goods rise, you need to take more social support measures for the population groups that are most affected.”
Millions of Russians will receive a boost in August from cash benefits that Putin promised in April during his annual State of the Union address, including a one-time payment of 10,000 Rbs ($137) per child to families.
Putin told economic officials this week that the Federal Reserve’s reluctance to target inflation was partly to blame for the surge in Russia, but admitted that Moscow’s swift lifting of lockdown measures has also pushed inflation above expectations. central bank had driven.
Nabiullina said the central bank’s strict 4 percent target was itself a way to fight poverty. “Inflation, as we know, is a tax on poverty. The poor are the ones who suffer the most. So our policy of reducing inflation and stabilizing it at a low level is aimed at reducing the effect of inequality,” she said.
The central bank will look into lowering that target further to 2 or 3 percent in September, Nabiullina added, with a view to making a decision by mid-2022. Russia’s monetary policy is unlikely to become neutral until 2023, it added. them to it.
“We don’t think our policies are aggressive now,” Nabiullina said. “The deposit rate is below inflation, let alone inflation expectations. People think they are weak and not tall enough to save.”