Russia in the spotlight Q3 2016

-The Central Bank of Russia: driving down inflation      
Since the appointment of the new Chair Elvira Nabiullina, the Russian Central Bank (CBR) sharpened its tools for driving down inflation. It is likely that the CBR will achieve the rate of inflation of 4-5% by the end of 2017, close to its target of 4%. At the same time, we believe that inflationary pressure is building up in the system as the money supply is growing faster than GDP on the back of transfers covering budget deficit. Unless the budget deficit is reduced, the CBR may struggle with keeping inflation low and will likely have to keep real rates relatively high for longer to prevent the return of high inflation.

Key directions of the new policy
Inflation has rarely dipped below 6% for the last five years in Russia despite the fact that 3-4% has been the medium target for inflation since at least 2012. Since stepping in as the chief of Central Bank of Russia’s in summer 2013, Elvira Nabiullina almost immediately began to redesign the CBR’s toolbox to tackle inflation, and rather successfully to date. The changes concerned completing the move to a floating rouble, a cleansing of the banking system coupled with timely and effective support for stronger banks, a focus on transparency in communication, and consistency of monetary policy decisions with the key objective.
Collectively, these measures help reduce inflationary pressure and manage expectations, which makes it likely that the CBR will bring down inflation to 4-5% in 2017 – close to its inflation target of 4%.