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Russia gets its wish at last as inflation set for record low

Russia gets its wish at last as inflation set for record low

MOSCOW: 10 Bank of Russia Governor Elvira Nabiullina is getting better at keeping her word.  After sticking with an unprecedented pledge to hold interest rates this quarter, policymakers are on track to meet their price-growth forecast for the first time since 2011 by pushing inflation to the lowest year-end level in modern Russian history. While economists have brought their forecasts closer to the central bank’s 4% goal for this year, they still project it above target, and household expectations remain high. The annual price index fell more than estimated by economists to 5.4% in December from 5.8% a month earlier, the Federal Statistics Service said on Friday. That’s less than half the level a year earlier and matches the lower end of the central bank’s forecast for 2016. ‘The Bank of Russia has chosen tough adherence to its policy, said Olga Sterina, a senior fixed-income analyst at UralSib Bank. ‘In the first half of the year everybody expected the central bank will reduce the key rate aggressively.

Delivering on the forecast will boost credibility for a central bank that’s been stingy with rate cuts through much of Russia’s longest recession this century. While some bank executives have gone as far as ‘pray for monetary easing, policy makers have stopped at two reductions in 2016 and said they will maintain their ‘moderately tight stance over the next year and a half. Risks still abound as inflation expectations remain elevated. While on the decline, they’re easing at a pace ‘insignificant and not aligned with the inflation slowdown, according to Nabiullina. The governor has said the change in expectations isn’t enough for the central bank to say they are anchore and present no risk for consumer-price growth. A rally in the rouble has aided the historical slowdown in prices by making imports cheaper.

The Russian currency is the world’s second-best performer this year with a gain of almost 20% against the dollar. On the other side, a downswing in incomes during the recession and elevated rates that make savings more appealing have restrained consumer demand. The disinflationary impact of weak demand is now fading. A gauge tracking Russian services industry has remained above the threshold that separates contraction from growth for 11 months, rising in December to the highest in more than four years, according to IHS Markit. ‘Firms remained optimistic about their future growth prospects, it said in a statement Friday. ‘Russian service providers cited stronger underlying demand as the key factor driving growth during December. That helps explain why the central bank is set to keep borrowing costs elevated even as its price target seems within reach.

Under its 2017-2019 policy guidelines, the ‘equilibrium level of interest rates for the economy is seen at 2.5 to 3 percentage points above inflation over the medium-term horizon. Still, the Bank of Russia intends to keep its benchmark ‘somewhat higher during a transition period to reduce price growth and inflation expectations, according to the report. ‘There never was such a level of trust from foreign investors in the Bank of Russia’s policy on reducing inflation, said Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow. ‘Market confidence that the inflation target will be reached is growing.