Bank of Russia predicts decline in inflation

Bank of Russia predicts decline in inflation

The Bank of Russia has published a new inflation forecast. According to the bank, the inflation rate will slow in 2016 more than the central bank previously predicted: by the end of 2016 the inflation rate will be 56% instead of 67%, a report of the Bank of Russia on the dynamics of consumer prices says.

"The price growth for most goods and services have continued to slow down: core inflation fell by 0.1% to 7.5%. On average over the last three months the current annual inflation rate was about 5%. This indicates a potential for further slowdown in the annual inflation in the absence of unforeseen shocks," cited the report as saying.

The Central Bank notes that there are certain pro-inflationary risks linked to increased inflation expectations, lack of fiscal consolidation strategy and uncertainty about the indexation of wages and pensions.

Thus, the food inflation rate, which accelerated at the end of May by 0.3% from 5.3% in April to 5.6% in May, is causing concern.

Vestnik Kavkaza asked our experts whether this forecast suggests economic stabilization for Russia, and which force majeure circumstances may cause the inflation rate to grow.

Professor of the RANEPA faculty of Finance, Money Circulation and Credit, Yuri Yudenkov, told Vestnik Kavkaza that the optimistic forecast of the Russian Central Bank does not mean that the economic situation in the country has stabilized.

"I cannot say that the economic situation is getting better, because it is not clear what indicator we use as a basis. I assume that the inflation rate is reduced because of the impoverishment of the population. The population has been drastically reducing consumption, therefore they are offered goods of lower quality, but less expensive. Therefore, if inflation is viewed as a rise in prices, we see a price decrease. Therefore, the Central Bank correctly determines that our population will get poorer in the future," the economist noted.

At the same time, the expert believes that, progressing from these figures, the Central Bank will continue to reduce the key rate. "It still has 0.5% of the stock, but it will have no effect. Moreover, the inflation rate may rise, if we assume that the budget starts to finance some large-scale projects. If they start financing any new projects, then it is likely that inflation will spin up," the Professor of the RANEPA faculty of Finance, Money Circulation and Credit suggested.

"The Bank of Russia has ceased pursuing an active policy, and the banking sector is not the driver of the Russian economy. If the economy develops somehow, it will not happen because of the banking sector," Yuri Yudenkov concluded.

An associate professor of Stock Markets and Financial Engineering of RANEPA, Vasiliy Yakimkin, speaking with a correspondent of Vestnik Kavkaza, stressed that the Central Bank's new forecast concerns inflation, not stabilization. "With regard to inflation, I think everything will be determined in the coming weeks. If the tariffs of natural monopolies will be increased by 6-7%, it will reach the bottom, the inflation rate will not fall lower. It is clear that inflation depends on oil and gas rates, excise taxes on gasoline and kerosene. But since the Central Bank is aware of it, I think it can stop raising tariffs of natural monopolies and let them solve their problems by increasing productivity and optimizing expenditure processes, not at the expense of consumers," the expert suggested.

With regard to a possible reduction of the key rate, an associate professor of Stock Markets and Financial Engineering of RANEPA assured that this process will continue. "There is no reason to keep it, of course, this stabilizes the exchange rate, as many of our Western partners play CarryTrade. And as soon as the rate is reduced, the yield of the ruble will decline, correspondingly, the smaller number of transactions will be carried out by global funds to purchase rubles. That is, the ruble will become cheaper and as a result - the inflation rate will grow. Therefore, the Central Bank must clearly solve the optimization problem and determine at what rate the ruble will be stable and the inflation the lowest. That is, I think the key rate will be reduced, but very slowly," the economist explained.

The expert named oil prices as the main threat to inflation. "Secondly, if the Americans will toughen the sanctions, it will not be good either. And, thirdly, the Federal Reserve's policy, if it starts to tighten the screws of the monetary policy and raises its rate, the ruble exchange rate will slightly decline and import prices will rise. Now, of course, the domestic demand is constraining Russia's inflation. That is, people's incomes are falling, so they consume less. As soon as the demand increases, the prices will grow immediately," Vasily Yakimkin concluded.