REUTERS SUMMIT-Monetary policy can't fix Russia's structural problems - central banker
central banker@ (For other news from Reuters Russian and Eastern Europe Investment Summit, click on http://www.reuters.com/summit/Russia13)
* Monetary policy a poor tool to boost weak economy
* Slowdown reflects structural weaknesses
* High inflation expectations a major concern
MOSCOW, Sept 24 (Reuters) - Russia's central bank has limited scope to reverse an economic slowdown that reflects underlying structural problems rather than tight credit, the bank's new head of monetary policy said.
Ksenia Yudayeva, appointed to head monetary policy under new Chairwoman Elvira Nabiullina, defended the bank against political pressure to cut interest rates to boost growth.
"One shouldn't exaggerate the possibilities for the central bank to increase economic growth," the U.S.-educated economist told the Reuters Russia Investment Summit.
The central bank has left its main lending rates unchanged for the past year, ignoring calls to cut them even though the economy has slowed dramatically. Economic growth is expected to be less than 2 percent this year, well below initial forecasts.
Yudayeva said the bank was not to blame for the slowdown.
"The fall in growth we're seeing most probably has a structural character," Yudayeva said.
"In essence, all the unused capacities for economic growth have been exhausted," she added. "We need investment-led growth for changing the economic structure, and for any economy that's a definite challenge."
She estimated that Russia's potential economic growth rate was now 2-2.5 percent - well down from the 4 percent growth seen over recent years, and of around 7 percent before the 2008-9 financial crisis.
Yudayeva said that slowing growth potential is visible in all the "BRIC" economies - Brazil, Russia, India and China - suggesting that this reflects a global economic rebalancing.
In Russia's case, it also reflects problems such as weak institutional development and over-reliance on natural resources, she added.
Yudayeva said that the biggest contribution the central bank could make to Russia's economic development would be to bring down inflation - which in turn meant bearing down on stubbornly high expectations of inflation among ordinary Russians.
"For now the population expects fairly high inflation," she said, referring to research the central bank has commissioned.
Next year the central bank aims to bring inflation down to 4.5 percent, from above 6 percent at present. The 2014 target may be raised as a result of a recent government decision to increase some utility prices, but Yudayeva said the central bank was still examining the impact of this decision.
She said that inflation ought to fall further before the central bank would be in a position to use active monetary policy as a tool for boosting a sluggish economy.
"If the central bank can really reduce inflation to 3-4 percent, and reduce inflation expectations, then we'll be able really to pursue a counter-cyclical policy. At the moment these possibilities are very, very limited," she said.
Lower inflation would also help long-term investment in the economy by reducing uncertainty, she added.
Although playing down the prospects for interest rate cuts to boost growth, Yudayeva said that the central bank was aiding economic development by improving the structure of the money market. For example it was introducing medium-term operations that widen the range of collateral banks can use to refinance cheaply.
She also said the bank would press on with its transition to inflation targeting, a regime that involves tighter control of interest rates instead of targeting the rouble's exchange rate.
"We don't have a policy of targeting any level of the rouble: We have quite a flexible and free exchange rate and we'll go further in that direction," she said.
Nor would the central bank be distracted from its long-term goals by temporary market jitters caused by the impending "tapering" of the U.S. Federal Reserve's monetary stimulus, whose impact on Russia she said was of secondary importance compared with domestic economic trends.
"We'll look at what happens in the economy," she said. "It wouldn't make much sense to make any special efforts to react to the actions of the Fed."
(Additional reporting by Oksana Kobzeva, Timothy Heritage, Maya Dyakina, Lidia Kelly and Dmitry Antonov; Writing by Jason Bush; Editing by Douglas Busvine)