Inflation surge in Russia is not temporary and will hurt economy, central bank warns

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Soaring inflation is not a temporary trend and poses a serious threat to Russia’s economic recovery, warned Central Bank chief Elvira Nabiullina.

“We have very high inflation and high inflation expectations. At first it seemed like it would be temporary. But now we don’t think so, ”Nabiullina said at the opening session of the St. Petersburg International Economic Forum (SPIEF) on Thursday morning.

“The continued acceleration of inflation will be an obstacle to economic growth.

Russian inflation is currently 5.5%, well above the official central bank target of 4%. Analysts expect the bank to raise interest rates by at least 25 basis points – from 5% to 5.25% – at its meeting next Friday. Nabiullina’s comments were one of her last chances to guide the market on its likely decision before the regulator entered a communications blackout in the days leading up to the pricing decision.

Her assessment puts her at odds with central banks in the United States and Europe, who have pointed out that the rise in global inflation resulting from the pandemic is a “transient”Phenomenon that does not require rate hikes or immediate cuts in asset purchase programs to suppress out of control prices.

“We normalize our monetary policy in a different way from that of developed economies. The US Federal Reserve and the EU see inflation as temporary. But we believe that inflation in Russia has a certain level of sustainability. We believe this is not a temporary increase, but a stable increase, ”she said.

Price increases in the United States reached their fastest rate in 13 years in April, as the economy began to open up after the coronavirus pandemic, commodity prices rose and manufacturers faced bottlenecks in their supply chains.

Nabiullina pointed to the high levels of consumer concern over rising prices as a dangerous trend that could plunge Russia into a vicious cycle of rising prices if not addressed.

“Inflation expectations are on the rise and at their highest level for four years. It changes behavior. Consumers are delaying their purchases … If we act late, we will have to raise the prices higher. The normalization of monetary policy is not an obstacle to economic growth, ”she said.

Given the history of Russia in terms of economic crises, devaluation and price volatility, inflation is a particularly important factor. sensitive subject – surveys regularly show that rising prices are the main concern of the public. While Russia’s official inflation rate is 5.5%, the public believes prices are rising almost three times faster, with observed inflation reaching nearly 15% in May.

The central bank said it would continue to hike rates during the year, reaching around 5.75% in December. But markets are forecasting a much larger increase, with prices suggesting traders expect rates to be closer to 6.5%.

Nabiullina’s comments gained support from Finance Minister Anton Siluanov, who added that Russian government spending should also be reduced to pre-pandemic levels – rejecting the idea that Russia could abandon its spending austerity.

“If we continue with an increased level of spending, we will overheat the economy,” he told the forum.

“We are already seeing some elements of it. Inflation is above our target of 4%. This will lead to devaluation of income, devaluation of wages and devaluation of government assistance. It is obvious that monetary policy and fiscal policy must change to play a normal role. “

“We are very clear that the longer it takes, the harder it will be to get out of these super soft policies,” he added.

“Emergency measure”

Both were speaking at the opening plenary session of SPIEF – Russia’s flagship economic conference, sometimes referred to as the “Russian Davos”, in reference to the annual meeting of the World Economic Forum in Switzerland.

The first session is reserved for the country’s main economic decision-makers and has previously been a forum for tense public debates on whether the government’s economic priority should be stability and inflation control, or boost growth and raise incomes.

While Nabiullina and Siluanov were aligned on the need to contain inflation, the two diverged over Russia’s controversial use of price caps and export quotas to limit price increases in certain products. food.

“Let’s not exaggerate the situation,” said Finance Minister Siluanov. “The high prices are worrying. But we never said “tomorrow in stores the price of bread should be 100 rubles”. We’ve never done anything like this.

Since the beginning of the year, the Russian government has entered into a series of agreements with distribution chains and producers in the country to limit the prices of certain products such as sugar and oil – a measure the government says has helped keep prices under control.

Central bank does not agree. Governor Nabiullina doubled down on his criticism on Thursday, saying temporary price caps distort the economy and their impact on inflation is unclear, as consumers know prices will rise once government restrictions are lifted. She also cautioned against a longer-term government solution, such as subsidizing suppliers who sell products like grains, sugar and oil within a price range approved by the government.

“My point of view is clear. Price regulation in a market economy should only be an emergency measure, ”she said.

“The whole economy cannot be based on fees, buffers and subsidies. “

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