Oreshkin Goads Bank of Russia on Growth as Inflation Slows

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Russia’s Economy Ministry isn’t happy the country’s inflation rate is slowing below the 4% target as it tries to jumpstart growth, and it’s pointing the finger at the central bank.

Consumer-price growth is set to slide to 3% at the end of next year, down from the previously projected 3.8%, as retail demand stalls, according to report released by the ministry on Monday. Weak consumer demand will weigh on economic expansion in 2020, which will slow to 1.7% from 2% forecast in April, the ministry said.

The grim prognosis comes ahead of the central bank’s Sept. 6 rates meeting that will determine if the easing cycle continues after two successive cuts brought the key interest rate down to 7.25%. The economy of the world’s largest energy exporter could use the help. Consumer demand is weak after five years of stagnating incomes and the Economy Ministry expects investment, led by President Vladimir Putin’s $400 billion spending plan to 2024, to replace it as the main growth driver.

Economy Minister Maxim Oreshkin warned in a national radio interview last month that “the economy will definitely fall into recession” if a surge in consumer lending continues unchecked until the bubble bursts on its own. “Our estimate is that 2021 is the year when it blows up,” he said on Ekho Moskvy radio.

His comments opened a public breach with the central bank, which has dismissed his warnings as unfounded and brushed off his calls for it to move more decisively to curb lending. It argues the main obstacle to faster growth is slow progress on reforms to improve the investment environment -- the responsibility of Oreshkin and his government colleagues.

Economy Decelerated

Russia’s economy decelerated sharply this year, expanding 0.7% in the first six months after 2.3% growth in 2018. A decline in nominal budget spending in the second quarter dragged on investment, but a spike later in the year will help growth, the central bank said in a report earlier Monday.

The numbers don’t bode well for Putin, whose ambition of turning Russia into a leading economy while providing consistent improvements in living standards has failed to materialize so far. The current trend seen in the first half of the year isn’t satisfactory, he told officials at a meeting earlier Monday.

The Economy Ministry cut its forecast for real-income growth to 0.1% this year from the previously seen 1%, and projected an increase in the poverty level to 12.5% of the population in 2019 and 11.7% in 2020.

The ministry’s latest inflation forecast already assumes “considerable” easing in monetary policy, Oreshkin told reporters Monday, while declining to say how much he expects.

One economist out of 13 in a Bloomberg survey expects the bank to keep rates unchanged next month, while the rest see a quarter percentage point cut. Economists in a separate Bloomberg survey see the key rate dropping to 6.75% by March 2020.

“With the ruble where it is right now and no economic growth, it will be really easy for inflation to fall below 3% in some months next year,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “The central bank will cut rates in September and lower its inflation forecast as it has a few times already this year.”

--With assistance from Zoya Shilova.

To contact the reporters on this story: Anya Andrianova in Moscow at aandrianova@bloomberg.net;Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net

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

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