Russia Should Keep Inflation Target It Can’t Hit, Analysts Say

(Bloomberg) -- The Bank of Russia should resist pressure to lower its 4% inflation target, even as prices rise more slowly than expected, according to a majority of economists in a Bloomberg survey.

Governor Elvira Nabiullina has come under fire for sticking to her target even after five consecutive interest rate cuts last year failed to spur inflation. Senior members of the country’s recently disbanded government advised the central bank to shift to a lower goal, according to two officials who asked not to be identified because discussions aren’t public.

Four economists in Bloomberg’s survey of 20 analysts suggested that the central bank should change the target. Just one of those thought Nabiullina is likely to buckle to critics and alter the 4% goal within the next year.

“If the bank fails to meet its own inflation target, it would mean its monetary policy has failed,” Sberbank CIB strategist Nikolay Minko said. “The bank needs to cut the rate aggressively instead.”

The central bank didn’t respond to a Bloomberg request for comment.

With growth below 2%, the government is under pressure to boost Russia’s stagnant economy and some officials have publicly lambasted the central bank for not doing enough to support that aim. Nabiullina has blamed the plunge in inflation on underspending by the government after progress on a $400 billion infrastructure plan got caught up in bureaucracy last year.

Earlier this month, President Vladimir Putin appointed a new cabinet led by former tax chief Mikhail Mishustin and stacked with advocates of faster government spending and investment. Annual inflation is still likely to slip below 3% in the first quarter and forecasts don’t point to a rise above 4% any time soon.

“Inflation expectations aren’t anchored yet so it would probably be harmful to revise the target at the moment,” Bank of Russia First Deputy Governor Ksenia Yudaeva said earlier this month. “We still have work to do at this target level. We need to anchor inflation expectations and attain more sustainable inflation.”

Changes in central bank targets aren’t unprecedented, but most economists say Russia’s undershoot hasn’t been going on for long enough for it to consider rethinking its policy. Price growth fell below 4% in October, but it was also below the target for over a year in 2017-2018.

What Our Economists Say:

“The 4% target is still new, and it’s too soon to declare that inflation expectations have anchored to it. Price gains may be low now, but much of that reflects temporary influences.”

-- Scott Johnson, Bloomberg Economics. READ: Three Reasons Lower Inflation Target Is Bad Idea

Analysts at Goldman Sachs Group Inc. warned last year that the central bank is underestimating the potential of inflation slowdown and that the pressure to change the target will rise.

Nabiullina may address the issue when the central bank meets to decide on interest rates on Feb. 7.

--With assistance from Evgenia Pismennaya.

To contact the reporters on this story: Anya Andrianova in Moscow at aandrianova@bloomberg.net;Zoya Shilova in Moscow at zoya@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Natasha Doff, Tony Halpin

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