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Russia’s central bank criticizes the easy money policies of its peers

Russia's economy is facing a different range of issues than those facing the U.S., Japan and the euro zone and so the central bank has to take a different approach, Russia's central bank governor told CNBC, questioning whether other central banks still had the means to influence their economies.

"Whether (other) central banks still have in their possession the types of tools to influence this situation (is the subject of a very broad discussion)," Russia Central Bank Governor Elvira Nabiullina told CNBC in Moscow.

"Whether they are already finding themselves on the brink of negative interest rates and some are already in negative interest rate territory. These are most certainly not trivial problems. But as far as the Russian economy is concerned, we find ourselves in a totally different situation," she said.


Elvira Nabiullina, Russia's central bank governor.
Andrey Rudakov | Bloomberg | Getty Images
Elvira Nabiullina, Russia's central bank governor.

Nabiullina was critical of the environment of easy monetary policy that other central banks have created in recent years with their quantitative easing (QE) programs. These were aimed at boosting liquidity, investment and economic growth but they have not necessarily translated into investment in the real economy.

Rather, there has been increased liquidity in financial markets, prompting concerns of an equity and bond bubble that will burst when QE programs are eventually wound down and monetary policy "normalized."

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Nabiullina warned that "because of the continued easing of monetary policy in many countries there is also the possibility that a higher level of financial market volatility will persist."

She conceded, however, that many central banks do try to follow a "very moderate, cautious policy, trying to manage expectations and to create as few surprises for the markets as possible."

Cautious stance

While central banks in Japan and the euro zone are trying to boost inflation and growth, the Russian central bank is trying to combat high inflation, brought on by international sanctions and a slump in the oil price that sent the Russia ruble into a tailspin and caused a spike in prices and a recession.

This has posed a challenge for Russia's central bank which made tackling rampant inflation its priority, rather than promoting growth with lower interest rates. The inflation rate is slowly coming down, however (it stood at 6.6 percent in September) and last week, the central bank cut its key interest rate for the second time in a year, lowering the rate to 10 percent. It cited the slowdown in inflation as a reason for its decision, although it warned that economic activity remained "unstable."

The bank said that it would continue its "gradual rate cut strategy" in order to stabilize the rate of inflation to 4 percent by 2017. The bank forecast that it would reach this target in late 2017 and said further rate cuts would take place in the first or second quarter next year.

The bank has come under pressure to cut rates faster in a bid to stimulate the economy and borrowing but is wary of stoking inflation, which it has been at pains to reduce. As such, it ruled out another rate cut this year.

Nabiullina told CNBC that just because inflation was going down didn't mean "that there are no inflationary risks."

"Although inflation has been going down in accordance with our forecasts these have been affected by external factors and a stronger ruble and a good crop yield, and in order to ensure that inflation will continue to go down, that inflation expectations will be decreased and this trend strengthens, we have sent a signal to the market saying that our policy is going to remain moderately tough in order to ensure that inflation reduces to our target level," she said.

Problems at home

The Russian economy looks to be slowly improving although Nabiullina stressed that there were still domestic issues, such as a lack of investment and need for structural reforms, that had to be addressed.

Russia's gross domestic product (GDP) declined 3.7 percent year-on-year in 2015, according to the country's statistics agency Rosstat. Russia's economy is expected to shrink 0.6 percent in 2016 (instead of a previously mooted contraction of 0.2 percent), the Economic Development Ministry said earlier this month, TASS reported, showing that despite remaining in recession, the economy is heading in the right direction.

Nabiullina said that Russian investment needed to improve, however, and that the bank could only do so much to support economic growth with its monetary policy.

"The first thing we see is that the key limiting factor for investment is not so much our high (interest) rate and tough monetary policy but rather structural limitations, the state of the investment climate and so on," she said.

"Irrespective of what kinds of events that may have been taking place in these various countries in different parts of the globe. Our monetary policies are capable of coping with those shocks that might come to pass. We have a sufficient number of tools that we've used in the past and continue to use. But the main challenges that we need to meet are internal ones," she added.

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