Including by Russia's minister of economic development
The Russian central bank’s dedication to its inflation target has drawn comparisons tofetishism and idol worship. Now economists say a better path to credibility lies elsewhere.
Bringing down inflation expectations is the single most important yardstick in assessing its credibility, according to one-third of respondents surveyed by Bloomberg. The Bank of Russia’s success at meeting inflation goals was ranked second, the poll of 30 economists showed.
“A sustained drop in inflation expectations means that economic entities have accepted the bank’s ability to promote macroeconomic stability,” said Charles Movit, an economist at IHS Global Insight in Washington. “It is a leading indicator while meeting inflation targets is a concurrent indicator.”
The question of how to size up the central bank’s performance is in focus as next year’s target of 4 percent looms ever larger in its decision making. That’s prompted Economy Minister Alexei Ulyukayev to scoff at its fixation as a “numerical fetish” that falls short of the policies Russia needs.
“Inflation targeting isn’t about worshiping the idol of the 4 percent consumer-price index,” Ulyukayev said in an opinion piece in the Vedomosti business newspaper. “It’s about managing inflation expectations through dialogue with society.”
Even as the central bank pivoted to an easing bias in April for the first time this year, it made any rate cuts conditional on inflation risks falling enough for policy makers to have “greater certainty” of reaching their price aim.
A lot is riding on success or failure after the Bank of Russia overshot its target in 2015 for a fourth consecutive year and already conceded it’s at risk of missing the goal in 2017 after turmoil in the oil market and the ruble. Governor Elvira Nabiullina is attaching a greater weight to the pursuit after prices soared to a 13-year high of 16.9 percent in 2015, gutting domestic demand and undermining investment.
The Economy Ministry’s forecasts, backed by the government in April, show the rate won’t slow to 4 percent until 2019. Price growth will average 8 percent this year and 6.8 percent in 2017, according to an April 22-27 survey of economists. Annual inflation was at 7.3 percent in April, unchanged from March.
The debate is opening up a rift as authorities look to reverse an economic contraction that entered its second year. The central bank has paused since July by keeping the benchmark interest rate at 11 percent after five reductions rolled back most of an emergency increase to 17 percent in December 2014.
The Russian currency has stabilized this year as crude rebounded, gaining almost 13 percent against the dollar after a 20 percent loss in 2015. Forward-rate agreements are signaling nine basis points of decreases in borrowing costs during the next three months.
Next year’s target “is both quite ambitious and still far away,” said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “So, with inflation expectation surveys now available, a more important practical near-term goal is to show that Russians increasingly expect lower inflation in the future, steady this opinion and adjust their economic decisions accordingly.”
First Deputy Governor Ksenia Yudaeva has said the Bank of Russia needs no less than 15 to to 20 years of meeting its price-growth targets to match the credibility of the European Central Bank. “Slowly declining inflation expectations against the target” were among the main reasons that risks to price growth “remain elevated,” the Russian central bank said in a statement following its last rate meeting in April.
By that measure, the outlook is far less upbeat. While the annual consumer-price index is now at less than half November’s 15 percent, the median value of inflation expected in a year dropped by 1.2 percentage points in the same period to 14.6 percent, according to a consumer survey used by the central bank.
Such attitudes partly explain why borrowing costs remain high at commercial banks. According to the regulator’s latest data, rates on corporate ruble loans of up to one year actually increased between January and February. Annual inflation slowed by 1.7 percentage points in that period.
The central bank predicts inflation will be at about 5 percent next April. In modern Russian history, the annual price index was near or below that level only in 2012, when authorities pushed back annual increases in utility tariffs.
“Russians need to believe that the central bank can keep inflation low,” said Christopher Shiells, a senior emerging-markets analyst at Informa Global Markets in London. “This is what consumers are basing their decisions on.”