By Vestnik Kavkaza
Acceleration of inflation in Russia in September was caused by the weakening of the ruble against the dollar amid growing geopolitical tensions and falling oil prices, economists say. Head of the Central Bank Elvira Nabiullina presented her view of the financial sector at the Investment Forum "Russia Calling!".
"If the economic slowdown is mostly structural in nature, then the measures should be also primarily structural, and monetary incentives can have a positive effect only as additional measures, in combination with measures of a structural nature . Otherwise, monetary stimulus will lead to higher inflation, capital flight and devaluation pressure. But if the slowdown has a cyclical character, this is the basis for softer monetary policy, Nabiullina says.
"The current situation is the result of a combination of three factors, but, by the assessment of the Central Bank, structural factor is dominant. Justifications for this are well known, they are now being discussed. If we look at the state of the labor market and not just on the index of the general unemployment, the latest data is 4.8% with seasonal change to 5.1%. This is a very low rate of unemployment. But there are other indicators of the labor market: the number of working hours, the number of people on forced leave. They show that the condition of the work force is close to full employment. Certainly, the labor market has significant problems, such as low productivity, and even with high employment people can work full time, get paid, but at the same time produce less output. This is a hidden form of unemployment: our economy is often adapted to the harsh conditions of economic slowdown of labor in this way. In our view, the situation in the labor market can not be solved by the measures of monetary stimulus. We need structural measures related to the possible flow of labor to more efficient sectors, more efficient production and higher labor productivity,", - says the head of the Bank of Russia.
The second factor that indicates that deceleration is mainly of a structural nature, is the capacity utilization. This is not a very reliable indicator, and it is measured in different ways, but comparing today's capacity utilization to the pre-crisis level of 2008, we have almost reached it. Competitive production capacity is largely occupied. There are sectoral differences, but speaking of the general economic, this is true, - Elvira Nabiullina contends.
"The third factor is the decline in external demand. This happens the Russian economy to a great extent under the influence of stagnation in the European zone and the economic slowdown in China. It is difficult to establish whether this factor is structural or cyclic, because there are structural changes in the global economy, and new technologies are being introduced. I think it would be naive to expect that demand for our imported goods will return to the level before the 2008 crisis. The decline in external demand may be partially compensated by stimulating domestic demand, but in the current state of processing sectors our economy is hardly ready to absorb such volume of raw materials, metals, and oil. This requires investment in processing. To do this, we once again need to overcome infrastructure bottlenecks."
Thus, for Nabiullina, structural changes are most important: "The improvement the investment climate, the reduction of administrative costs in the economy, fair competition aimed at selecting of the most efficient, and investment in infrastructure. Infrastructural changes should widen the bottlenecks and give a multiplier for the economy and the labor market."
Nabiullina also named the principles on which the Central Bank builds its policy:
"The first principle is no restrictions on the flow of capital. We believe this is the important achievement of economic policy of the previous period. And the rejection of this achievement can really throw us back to many years ago. At the same time, we understand the concerns of our business about the decline of the access to foreign markets and the external debts that must be paid. Therefore, our banks, our companies are in a difficult situation. However, realizing these concerns, we also see the fundamental factors which enable to cope with this pressure. Still, the ratio of the total corporate, public external debt to GDP is at an acceptable, low level. After the 2008 crisis, many banks and companies have worked on their currency positions, and these are more or less balanced. The structure of debt in terms of urgency as well as in terms of holders, who are mainly exporters with foreign currency earnings, is much better now than in 2008 and even better than the current situation on many emerging markets. Plus, of course, the Central Bank and the government have reserves to support financial stability. Flexibility in the instruments is needed. We recently decided to introduce short-currency swaps. I must say, by the way, the day before yesterday after the absolutely baseless rumors about the possible introduction of restrictions on the flow of capital, this one-day load currency swap worked, and yesterday the currency already returned. In addition, we are planning to introduce in a few weeks currency repurchase agreement for 7 and 28 days. We believe that this will help our businesses and our banks to cope with the problems that exist in connection with the closing of foreign markets.
The second principle is related to inflation and its character. A very important focus of our policy is inflationary expectations. It is high inflation expectations that is a key factor in the growth of medium and long term interest rates. It is very important to anchor and maintain inflation expectations at a stable low level. This is much more difficult than to achieve a low rate of inflation in a given year. We understand this very well. We are being asked ask why we are completing a long-term transition to inflation targeting right now, when we have a surge of inflation and serious external challenges. We believe that this should be done, first of all, due to the fact I have mentioned. Our diagnosis is the economic slowdown is primarily structural in nature, so the economic growth of investment-oriented type is needed. This requires long-term investment at affordable rates. In order to have this, it is necessary to create incentives for savings, and low premium for urgency, which directly depends on inflation expectations. Therefore, the transition to inflation targeting, which is aimed not only at reducing inflation, but also at reducng and anchoring inflationary expectations, is important, on our view. Another frequently asked question is how the task of reducing inflationary expectations can be combined with the transition to a floating exchange rate, namely, the risk of inflation expectations following the growth of expectations on the exchange rate? We understand that such dependence exists and we are ready for this advance. We will not completely withdraw from the currency market, we will carry out foreign exchange intervention or use alternative instruments such as currency swaps, of which I spoke, for solving the issues of financial stability. And most likely, we will intervene more often than the countries with a long experience of inflation targeting. We will act as they they did in the early periods, when they moved to inflation targeting. And the key factor for us at the end of long-term period of the transition to this type of policy will be flexibility in terms of the tools (we use non-standard tools, while maintaining the stance of monetary policy) and in terms of refinancing (we provide refinancing for non-tradable assets). Thus, for us it is very important not to lose the strategic objectives, to be consistent with the policy and to exercise appropriate flexibility, which time and new challenges require from us.
