Russia’s central bank expects to reach its inflation target of 4% by the end of 2017 even if oil prices remain close to current levels, governor Elvira Nabiullina told Reuters.
Her comments indicate the bank remains optimistic about inflation trends - and with them the possibility for lowering interest rates – even though oil prices have fallen much further than previously expected, adding to economic strains.
“If one is talking about the base scenario, with a price of $30-$35 per barrel, we see that we can reach our goal of 4% inflation in 2017 without raising rates,” Nabiullina said in an interview cleared for publication yesterday.
She said that under its base scenario, in which the oil price is assumed to average $35 per barrel in 2016, the bank did not envisage a need to raise its key policy rate to reach its inflation target, if there are no additional external shocks.
However, in the alternative “risk scenario”, which assumes the oil price averages $25 per barrel, the bank may need to raise rates.
“In the risk scenario it will be necessary to look at what happens to inflation risks. ... If inflation risks rise we are ready to increase the key rate,” she said.
The bank may reduce its policy rate under both scenarios, she said, but it may come down later and “a bit more slowly” in the risk scenario as inflation would also fall more slowly.
Low oil prices complicate the task of lowering inflation because they weaken the rouble, pushing up import prices, but also threaten to delay Russia’s recovery from a slump that shrank its economy by 3.7% in 2015.
Worries about inflation mean the bank has left its policy rate on hold at 11% since July, but inflation fell into single digits in January for the first time since November 2014.
The bank has long sought to reduce inflation by the end of 2017 to 4%, the target it uses as its main policy guide.
Nabiullina also said the bank had not changed its intention to raise its international reserves to $500bn, but said this was “a guide not a target” and that the policy would only be resumed “when markets are stable enough and there is a possibility (for reserve accumulation)”.
She said that while it was possible for the forex market to stabilise at an oil price of $30-$40 per barrel, “neither in the base scenario nor in the risk scenario do we assume an accumulation of reserves”. Her comments suggest that the bank is in no hurry to resume the policy of purchasing foreign currency on the market that it briefly pursued between May and July last year.
Russia’s international reserves presently stand at $382bn, well below the $500bn that Nabiullina said last year represented a desirable long-term level. The bank’s reserves replenishment policy is being closely watched by the forex market as such purchases of foreign currency could potentially weigh on the rouble.
Some government officials have suggested resumption of forex purchases by the central bank could be used as a tool to prevent the rouble strengthening in future – a policy that would cast doubt on Russia’s commitment to a floating exchange rate.
However, the central bank has repeatedly rejected the idea that its reserve replenishment policy is designed to influence the rouble’s value.