Russia’s central bank governor has warned that inflation is set to be a long- term phenomenon in her country, signalling that the bank is likely to continue with its tough monetary policy stance.
Elvira Nabiullina told the Financial Times in an interview that public fears over soaring prices lay behind the central bank’s concerns. Sharp rises in food prices had “de-anchored” ordinary Russians’ inflation expectations, she said, with polling showing consumers predicting an increase of more than double the central bank’s projected annual figure.
Inflation expectations carry the risk of encouraging the public to stock up on goods in an effort to beat inflation but thereby actually driving up prices. They also run the risk of stoking wage rise demands and pre-emptive price rises by businesses.
The central bank has responded by raising interest rates four times since March, including a full percentage point increase in July.
“We started targeting inflation later than many others and the population doesn’t have enough trust to understand that the central bank will always take decisions to put inflation back on track,” Nabiullina said.
Russia is among a small group of emerging market peers, including Brazil, that are taking a tougher stance on inflation than the Federal Reserve — which has played down the risk as a “transitory surge” caused by the pandemic recovery — and other countries that are keeping rates low.
After Russia slashed interest rates to their lowest-ever levels last year to restart economic growth, which stalled following its coronavirus lockdown, Nabiullina is looking to rein in a new surge in inflation that has given the Kremlin a political headache ahead of parliamentary elections in September.
The central bank raised its main lending rate to 6.5 per cent last week after a revised economic forecast predicted an annual inflation rate of 5.7 to 6.2 per cent in 2021, indicating it could raise rates further still later this year.
The new predicted inflation rate is a percentage point higher than previously forecast as the measure continues to drift away from the central bank’s target.
But polling shows ordinary Russians expect inflation to reach around 13.4 per cent after the price of several key household goods began to rocket last year, fuelled by a weak rouble, surging demand for the country’s commodities exports and a quick economic recovery from the pandemic.
Memories of rationing and high inflation are fresh for many Russians amid a long economic slump since 2013, during which real incomes have fallen by 11 per cent 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 the 2000s. Our people have only lived under low inflation for very short periods of time,” Nabiullina said. “Inflation expectations were more anchored when conditions were more stable . . . but they are reacting to the pandemic and the high price rises.”
A rare woman among President Vladimir Putin’s senior officials, Nabiullina has won plaudits worldwide for steering Russia’s economy through two financial crises since she took over the central bank in 2013.
She resisted pressure to abandon her orthodox approach to targeting inflation when falling oil prices hit the rouble in 2014, prompting her to switch the currency to a free float and raise interest rates as high as 17.5 per cent.
That strategy was vindicated in 2017, when inflation — which peaked at 17 per cent in her early years as governor — finally reached the central bank’s target of 4 per cent.
As inflation climbs, Russia has temporarily capped the price of some staples and introduced export restrictions. “We believe these are extreme measures and should be very short term, because the most important thing is to expand production so that you have investment. And for investment, you need conditions to be predictable, including customs, tariffs and taxes,” Nabiullina said.
“Saying that you might freeze prices on one kind of goods is probably the easiest thing to do. But we know there might be consequences,” the bank governor added. “If prices are going up on everyday and bulk goods, then you need to increase social support measures for the population groups that are the most affected.”
Millions of Russians are set to receive a boost in August from cash handouts pledged by Putin in his annual state of the union address in April, including a one-time Rbs10,000 ($137) payment per child to families.
Putin told economic officials this week that the Federal Reserve’s reluctance to target inflation was partly responsible for the rise in Russia, but he admitted that Moscow’s quick abandonment of lockdown measures had also driven inflation beyond the central bank’s expectations.
Nabiullina said the central bank’s rigorous 4 per cent target was itself a way of combating poverty. “Inflation, as we know, is a tax on poverty. The poor are the ones who suffer the most. So our policy of lowering inflation and stabilising it at low levels is aimed at reducing the effect of inequality,” she said.
The central bank will examine lowering that target further to 2 or 3 per cent in September, Nabiullina added, with a view to making a decision by the middle of 2022. Russia’s monetary policy is unlikely to become neutral until 2023, she added.
“We don’t think our policy now is hawkish,” Nabiullina said. “Deposit rates are lower than inflation, never mind inflation expectations. People think they’re soft and not high enough for savings.”