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UPDATE 2-Russian rate cuts depend on inflation-cbank chief
February 20, 2013 / 8:22 AM / 5 years ago

UPDATE 2-Russian rate cuts depend on inflation-cbank chief

* chairman says cuts possible if inflation falls

* Maintains that combating inflation key task

* IMF recommends steady policy, with tightening bias (Combines stories on central bank and IMF, adds quotes)

By Jason Bush and Katya Golubkova

MOSCOW, Feb 20 (Reuters) - Russia’s central bank can only consider cutting interest rates when inflation falls, its chairman said on Wednesday, resisting pressure for quick reductions to boost a flagging economy.

The central bank has faced criticism from business and politicians for refusing to loosen monetary policy, including from the country’s president Vladimir Putin.

Recent data on retail sales and industrial production have also been weaker than expected, adding to the pressure.

“The key task of monetary policy is to maintain a low and stable inflation rate,” the bank’s chairman Sergei Ignatyev said in testimony to the Federal Council upper house of parliament.

“We expect inflation to fall in the next few months, and if that happens we may start to cut interest rates. But there’s no promise,” he said, reiterating similar remarks he made last week.

In an interview with the Vedomosti newspaper published earlier on Wednesday, Ignatyev also rejected criticisms that interest rate policy was to blame for the slowing economy.

He argued that slower growth did not reflect a lack of aggregate demand, but was the result of supply-side bottlenecks such as poor infrastructure.

Ignatyev pointed out that the effective rate of interest that the central bank charges on its loans, in the form of repo credits, was 5.6-5.7 percent - below the rate of inflation, which was 7.1 percent in January.

He also emphasised that unemployment was low. “To cut interest rates against a background of rising inflation and record low unemployment would be very strange,” Ignatyev said.

However, he said that there was a 90-percent certainty of the central bank meeting its 5-6 percent inflation target this year, implying that inflation will fall.


The central bank’s reluctance to cut rates received support on Wednesday from the International Monetary Fund, which argued that if anything Russia may have to raise interest rates to bear down further on inflation.

Presenting the Fund’s annual economic outlook for Russia, the IMF’s Moscow representative Odd Per Brekk said that in the short run the IMF is recommending “to keep monetary policy on hold, but with a tightening bias”.

“This is because the key policy objective... should be to bring inflation credibly on a path towards the official targets,” Brekk added.

Inflation will be around 6 percent both in 2013 and 2014, the IMF forecast, implying that Russia may struggle to meet the 5-6 percent inflation target this year - and would miss its tougher 4-5 percent target for 2014.

Brekk said that the IMF regards Russia’s economic growth this year as being in line with its underlying potential, which the Fund estimates at around 3.75 percent per year.

“Growth cannot be increased durably through stimulus to domestic demand - be it through budgetary or monetary policies. Attempts to do so will lead to pressure on the price level and the balance of payments,” he said.

The IMF’s hawkish analysis tallies with that of the Russian central bank, which also argues that economic growth is in line with potential and that there is no output gap that provides room for monetary or fiscal stimulus.

The importance of the central bank’s inflation targets is increasing, as Russia completes the transition towards a formal inflation targeting regime, which also entails a mostly free-floating exchange rate.

In his comments to the upper house of parliament, Ignatyev reiterated the goal of completing the switch to inflation targeting by the end of 2014, but said that the central bank will not fully abandon currency market interventions.

“Transition to a completely free float of the rouble may lead to excessive volatility... Perhaps it will be necessary to keep some kind of mechanism to smooth out volatility,” he said. (Reporting by Katya Golubkova and Jason Bush; Writing by Jason Bush and Lidia Kelly; Editing by Toby Chopra)

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