Russia central bank urges government to help reduce non-monetary inflation risks

The government should employ policies that reduce non-monetary inflation risks because this will reduce the volatility of key CPI items and ultimately help the CBR continue with monetary easing in a sustainable manner, it emerged from a report on inflation risks that the CBR submitted to the government. As inflation fell tangibly, the volatility of inflation is now driven by non-monetary factors that are beyond central bank’s control, the head of CBR’s monetary policy department Dmitriev told reporters on Friday. The volatility can’t be reduced entirely, but can be contained, Dmitriev said.

The CBR classified non-monetary risks as external, internal, and ad-hoc factors (e.g. natural disasters). External risks are related to falling oil prices, rising prices of food products that tend to be exported (e.g. grain), and sanctions/countersanctions. The CBR recommended the government to pursue policies that help modernize and diversify the economy, promote import substitution, ease foreign policy tensions. Internal risks are divided into two main groups – structural and institutional. Structural risks call for reforms in education, R&D, and health sectors, as well as heavy focus on infrastructure and anti-trust policies. Institutional factors could be addressed if the government were to implement an administrative reform, reduce corruption, improve property rights, ensure a level playing field for all businesses, and improve business environment, the CBR said.

The CBR also noted that inflation volatility fell in 2016-2017 from 2015/2008-2009, but the volatility of different CPI items varies considerably. The biggest pressures come from volatility of food products, notably fruits (oranges, apples, bananas) and vegetables (potatoes, tomatoes, cucumbers) as well as meat. The contribution of fuel prices to volatility is much lower than it was the case in 2013-2014, while the dynamics of services prices largely depends on regulatory price indexations that are being approved by the government every year.

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