Nabiullina Lauds Positive Real Rates as Key for Russian Growth

(Bloomberg) -- Central bank Governor Elvira Nabiullina has a message for Russian businesses that may be finding it difficult to adapt to positive real interest rates: get used to it.

The Bank of Russia will continue its “moderately tight” monetary policy, with the inflation rate now below its benchmark for the past eight months, Nabiullina told a banking conference in the Black Sea resort city of Sochi on Friday. Keeping real interest rates stably in positive territory is an “important condition for healthy economic growth,” she said.

The main drivers of growth should be “fixed investment, structural changes in the economy and efficiency increases,” Nabiullina said. “It’s necessary to safeguard household deposits against inflationary depreciation to support a high level of savings and to create the conditions to transform them into investment.”

Russian policy makers are struggling to bring inflation to their target of 4 percent by the end of 2017, after they overshot their forecast in 2015 for a fourth consecutive year. The central bank’s goal is aligning with the government’s aims to shift to an investment-growth model after the crash in oil and the ruble’s crisis pushed the economy into the longest recession in two decades.

The central bank has cut its benchmark once in the past year, lowering it to 10.5 percent. Policy makers will decide on the key rate next Friday. Forward-rate agreements signal 49 basis points of decreases in borrowing costs over the next three months.

While consumer-price growth slowed to 6.9 percent in August from a year earlier, the lowest rate since tensions over Crimea erupted in February 2014, and expectations fell to the lowest in almost two years, there are still risks for the central bank to reach its goal.

Nabiullina Lauds Positive Real Rates as Key for Russian Growth

One of the threats is emerging from fiscal policy as the government’s second year of deficit spending floods the banking system with extra rubles. The central bank is concerned with the risk of a possible increase in unsecured retail lending, as liquidity shifts into surplus for the first time since 2011. Retail lending rising more than corporate borrowing, as was the case last month, is pro-inflationary, according to Nabiullina.

Moderately tight monetary policy means that interest rates, including the central bank’s benchmark, will exceed consumer-price growth by several percentage points, Nabiullina said. Such a policy is necessary for “both inflation and inflation expectations to continue to decline and firmly settle at a low level,” she said.

Positive real lending rates encourage producers and retailers to increase efficiency instead of relying on price increases to drive profit, and help prevent an excessive build-up of debt, according to Nabiullina.

“We see the stability of rates -- their predictable and gradual decrease as far as inflation slows -- as an important factor in stabilizing the economy,” she said. It’s also “one of the conditions for a shift to growth, based in particular on higher labor productivity and efficiency.”