Hard on the upturn: when to expect inflation to fall in Russia
"Braking path" to the inflation target of 4% in Russia will take the whole of 2025 and will take over 2026, said the head of the Central Bank of Russia Elvira Nabiullina. She also added that the country's monetary policy is aimed at ensuring that supply and demand converge at the right point, where there will be both price stability and sustainable economic growth. Under these circumstances, the rate has been used to prevent a descent into an inflationary spiral. How to accelerate the decline in inflation and what can prevent it - in the material of "Izvestia".
Situation assessment
The Central Bank forecasts inflation in 2024 at 8-8.5%. The Bank of Russia believes that it is now near or above the upper limit, and next year the figure will fall to 4.5-5%. The return of inflation to the 4% target is expected only in the first half of 2026.
Against this background, the Central Bank has indicated its intention to raise the key rate again at the December meeting of the Board of Directors. However, the final decision has not been made yet.
"Yes, we have a new pro-inflationary factor, the exchange rate, price growth remains high, but we already see from operational data that there is a slowdown in credit, including in terms of corporate loans. These are the latest operational data, they will be clarified. We see how banks' plans for lending are being clarified. And of course, we will take this factor into account, we will get more new data before the meeting of the Board of Directors", - said the head of the Bank of Russia Elvira Nabiullina.
At the same time, she emphasized that one should not expect that inflation "will dissolve by itself".
Available tools
The root cause of the current economic situation was the inflation shock in 2020, caused by a large issue of money supply, which was further supplemented by such events in 2022 as supply chain disruptions, unstable exchange rates, which together increased both transaction costs and inflation expectations of the population, Dmitry Kozlov, founder of the investment company The12 Capital, told Izvestia.
Now the Central Bank of Russia is using the key rate increase as the main tool to fight inflation. Further tightening of the monetary policy may accelerate the decline in inflation expectations and bring inflation closer to the target level, confirmed Denis Astafiev, founder of the investment company SharesPro. However, it is important to strike a balance, as excessively high interest rates may have a negative impact on economic growth and investment activity.
- The government may additionally consider fiscal measures to curb inflation, such as optimization of budget expenditures, revision of the budget rule and changing the policy of subsidizing interest rates," Denis Astafiev told Izvestia. In addition, it is advisable to carry out structural reforms, including stimulating competition in various sectors of the economy, improving the investment climate, increasing labor productivity, as well as developing social projects and infrastructure.
The central bank can also strengthen its communication policy to better manage inflation expectations, he added. Clearly informing households and businesses about the goals and measures of monetary policy will help stabilize expectations and build confidence.
The Central Bank is in a difficult situation. On the one hand, business, which does not have access to soft loans and subsidies, is pressuring the regulator through industry associations and lobbyists; on the other hand, raising the interest rate is one of the few tools available to the Central Bank to deal with inflation, Pavel Tubin, an expert on strategy and finance, told Izvestia.
If the rate is raised to the level where the entire economy, which is not directly financed from the budget, stands up, inflation will be closer to the target, Anton Tabakh, chief economist of the Expert RA rating agency, told Izvestia. But the price will be too high and it will be impossible to expand supply, as the head of state said today. The inflation target was set in other conditions, and perhaps its realization should be slow (the braking distance is longer) or the target itself revised.
Balance of intervention
It is possible to accelerate the process of inflation reduction by artificial methods, but if we talk exclusively about the tools of the Bank of Russia, then it will have to pay a high price, said Vladimir Yeremkin, a researcher at the Laboratory of Structural Research of the IPEI RANEPA RANEPA RASKhIGS.
- The Central Bank is able to suppress economic activity by imposing serious restrictions on the financial sector, but this will result not just in a decline in growth rates, but in an economic crisis," the expert explained to Izvestia. - By crossing the line between corrective action and large-scale government intervention that creates obstacles to the normal functioning of the market system, the Bank of Russia will put many businesses on the brink of survival.
If we go beyond the capabilities of the Central Bank, the greatest restraining effect on inflation would be the reduction of federal budget expenditures, for example, to the level of balancing its revenue and expenditure items.
- Today it turns out that it is the deficit budget, in which the government resorts to borrowing to ensure increased expenditures, that disturbs the market balance and adds resources to the overheated economy, which do not give the expected proportional return, but create side effects in the form of rising inflation," said Vladimir Yeremkin.
Not the first struggle
In the modern history of Russia at least three times fought against inflation with the help of different methods: in the 90's used methods of controlling the exchange rate, then it helped to reduce inflation, but led to a crisis of domestic production and eventually default, recalled assistant professor of the Department of Banking and Entrepreneurship at the State University of Management Akimov Oleg.
- In the noughties, a stabilization fund (now the National Welfare Fund) was created, where the government "froze" part of oil and gas revenues, and since 2014, the Bank of Russia has switched to the inflation targeting regime, where the key rate of the Central Bank became the main instrument. In periods of rising inflation, it is raised, and vice versa," the expert told Izvestia.
Inflationary factors are usually divided into demand factors (credit availability, growth of nominal incomes) and supply factors (actions of monopolists, crop failure or restrictions on imports).
- Today, the Central Bank actively uses restrictions on demand factors: the Bank of Russia significantly increases the key rate, imposes restrictions on various types of consumer lending and establishes macroprudential surcharges to the capital adequacy ratios of banks," he said.
For accelerated inflation reduction, in his opinion, it is necessary to apply methods related to supply factors. Thus, the state regulates tariffs for a number of public utilities, passenger transportation, communications and some other services. In addition, prices for tobacco products and alcoholic beverages depend significantly on excise rates. Accordingly, stricter regulation by the Russian government in this area will help to better control inflationary processes. At the same time, it should be remembered that any methods of controlling inflation always have negative effects on the economy or require additional expenditures from the budget.
Several factors may hinder the reduction of inflation in Russia, including the fall in the ruble exchange rate, instability in the banking sector, and unfavorable weather conditions for agriculture.
- The external environment regularly brings inflationary shocks - exchange rate movements, fluctuations in external prices of imported goods, transportation costs, sanctions risks, etc. are transferred to domestic prices. Of the internal drivers in recent years, the labor market has become very important, where the lack of flexibility in supply volumes results in a very significant increase in wages, which, in turn, fuels the growth of commodity prices," Dmitry Kulikov, director of the sovereign and regional ratings group at ACRA, told Izvestia. With the current tight labor market, I find it hard to imagine that there is any sensible economic policy that does not destroy markets that will accelerate the achievement of the inflation target so that it will happen faster than stated in the Central Bank's plans.
"Izvestia sent a request to the Central Bank, but at the time of publication no response had been received.
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