Central Bank of Russia has significant room for rate cut, as inflation situation is favorable, economy experiencing strong cooling - minister
VLADIVOSTOK. Sept 4 (Interfax) - The situation with inflation in Russia is now fundamentally different from the beginning of the year, with deflation in the last two months (excluding the July utility tariff indexation), the ruble quite strong and a good harvest, while on the other hand the economy is experiencing strong cooling; therefore, the Central Bank has significant room for easing monetary policy and cutting the rate, Economic Development Minister Maxim Reshetnikov said.
"For the Central Bank, the main task is fighting inflation, which is why a tight monetary policy is being conducted now, hence such high interest rates. On one hand, we indeed see the success of this policy - we have had deflation for the last two months, if we disregard the traditional tariff indexation in July. Weekly data for August show deflation in August. Therefore, we can say that overall the situation with inflation is fundamentally different compared to what it was at the beginning of the year. The Agriculture Ministry's assessments of the harvest are quite favorable, so we do not see any additional risks, although there may be some price fluctuations for individual products, which we are monitoring," Reshetnikov said regarding inflation in an interview with the Rossiya-24 television channel on the sidelines of the Eastern Economic Forum.
"Plus, the exchange rate is quite strong, and the issue of prices for non-food goods is not so acute," he said.
"Therefore, we see that the situation here [with price dynamics] is quite favorable, but this comes at the cost of a difficult situation in the economy," he said.
Russia's GDP growth was 0.4% year-on-year in July after a 1.0% increase in June, he said.
"We see that inflation in producer prices has stopped - prices have not changed over the year, which is generally not a very good factor as it indicates that there is insufficient demand in the economy. We see that many engineering plants are currently underutilized," he said.
"The economy is cooling strongly, and we proceed from the assumption that the Central Bank has significant room for easing monetary conditions, for cutting the rate. Beyond that, it is their prerogative," Reshetnikov said.
He said the government was "doing everything that it promised to the Central Bank within the framework of the coordinated policy - this includes scaling down or at least not expanding preferential lending programs and limiting lending to our largest state-owned companies."
"And the rate at which corporate lending is growing shows how much lending to both legal entities and individuals is cooling down. In general, we are going significantly below the estimates that we had, and along the lower trajectory of the estimates that the Central Bank had," the minister said.
"We also have our own discussion with the Central Bank. But we see the situation as quite complicated. And the consequences of this cooling will, of course, be that enterprises will now accrue a certain amount of losses, primarily on interest payments. It is clear that some of these loans will be restructured, interest payments will be deferred and so on. But enterprises - in any case, we hope that they will still get through this period - will have to pay back these debts, which means that a return to the investment phase of growth, unfortunately, will also be deferred," Reshetnikov said regarding the consequences of the cooling of corporate lending.
Reshetnikov said later in an interview with RBK TV that "our vision of the coming months, including for the Agriculture Ministry's harvest estimates, for reserves, for other parameters - we see that in general the inflation risks of the coming months are quite low."
No major imbalances are being seen in the food and non-food markets, the situation is generally balanced.
But the minister said the existing economic model, which was largely geared to commodity exports, needed to be fine-tuned.
"We have built an open export-oriented economy. We have increased exports, and we need to understand how we are going to balance [the ruble's strong exchange rate with export revenues]. We need to fine-tune this model," the minister said.
He said one change that would be seen in the forecast is "a change in the long-term forecast for the ruble exchange rate, it will be stronger."
"And, unfortunately, we will all have to adapt to this. This is a fairly serious challenge for the economy," Reshetnikov said.
"In the long term, we need to understand that if we do not have imports, then, in general, we will not have exports in those volumes that we might like. So the trend for the development of domestic manufacturing in these conditions, and for the domestic economy is, in general, quite inevitable. Given that we remain an open economy, it is important for us to develop exports other than commodities and energy, simply because there may be more added value there," he said.
