Stabilization of the Ruble will Permit to Reduce the Effect of Transfer of the Exchange Rate Value into Prices

It is to be noted that starting from June the consumer price index will be decreasing and amount to about 6% by the end of the year. According to Alexei Ulyukaev, the downward trend of growth in prices is related to the fact that a devaluation effect which had an impact on the level of prices has ceased to exist and the monetary and fiscal policies have become tougher.

It is to be reminded that in 2014 the target value of the inflation rate in Russia amounts to 5% with a band of admissible fluctuations of +/-1.5 p.p. At the present moment, the inflation rate within the limits of that band seems fairly realistic. Stabilization of the ruble and some appreciation of it in May (on May 28 growth in the ruble exchange rate against the bi-currency basket amounted to 4.7% as compared to the beginning of the month) as a result of the Russian Central Bank’s policy to increase the key interest rate, subsiding of panic sentiments among investors caused by a possibility of Russia’s interference in the Ukrainian situation, as well as a lack of tough economic sanctions against Russia permitted to reduce the effect of a transfer of the exchange rate value into prices.  

Another factor restraining the inflation rate is the absence of an explicit pressure on prices on the part of demand, as well as the effect of reduction of the rates of indexation of tariffs on services of natural monopolies. However, it is to be noted that within five months of 2014 the impact of a decrease in the exchange rate on the dynamics of prices has not revealed itself in full. According to the estimate of the Y. Gaidar Institute, on average within a month the effect of a transfer of the exchange rate value to the consumer price index amounts to 5%, while the bulk of adjustments of the level of prices to fluctuations of the ruble takes place in the next half-year.

Elvira Nabiullina, Chairman of the Central Bank of Russia said in St. Petersburg that within the frameworks of a transfer to the inflation targeting regime the Central Bank of Russia set the goal of achieving sustained low rates of inflation in the mid-term prospect. According to Elvira Nabiullina, a change of 4% a year in consumer prices is the most adequate one for Russia; it is to be noted that the direction of the mid-term trajectory of the inflation rate is more important than its value at a specific point.

In our view, that approach is in harmony with the international practice of realization of the policy of inflation targeting. Both in developed countries and developing countries which follow that regime of the monetary policy, the time horizon of the inflation target varies from a year (Brazil and the Czech Republic) to five years (Canada).

As seen from the experience of countries which have successfully applied the inflation targeting regime, deviation of the dynamics of consumer prices from the planed trajectory at individual moments are admissible and do not prevent achievement of target values of the inflation rate in the mid-term prospect in case of transparency and accountability of operations carried out by monetary authorities.

Also, Elvira Nabiullina stated that in taking of decisions on a change in the key interest rate the Central Bank of Russia analyses the ratio of risks to the inflation rate and economic growth. Due to the above, in a situation of reduced risks to the financial stability, lower inflationary expectations and the inflation rate being close to the planned mid-term trajectory, the monetary authorities will be considering the issue of reducing the interest rates.

At the same time, it is believed that in an unstable situation on financial markets temporary growth in key interest rates of the Central Bank of Russia was a move in the right direction and it has already adjusted to some extent a negative situation on the currency market. However, in case of preservation of that rate within a long period of time negative consequences may arise for companies’ financial solvency and investment and business activities.

Alexandra Bozhechkova, Researcher