Russians may have witnessed national interest rates on a steep path lower in recent years, but the governor of the central bank has suggested that more cuts could come as it closely monitors inflation and fluctuations in the oil markets.
"I think we should be cautious. We should be conservative and we should consider some inflationary risks," Elvira Nabiullina, governor of the Central Bank of Russia, told CNBC when asked about how stabilizing oil prices could affect the bank's benchmark rates.
She added that it was "very difficult" to predict the dynamic of oil prices for the longer term, mentioning a potential rise in shale oil production, but suggested that the bank could revise higher its baseline scenario for oil to trade at $40 a barrel.
"We should be very conservative in our monetary policy. We cut our interest rates and I think we have room for easing more but the pace of this easing will depend on the economic situation, on actual inflation, on inflationary expectations, on the dynamic of oil prices," she said.
"We are data dependent and every meeting, every policy setting meeting we analyze all these factors and we decide the next step."
Russian inflation has slowed to just above 4 percent from levels of nearly 17 percent just over two years ago, according to data from Reuters. Nabiullina stated that the target was for inflation to hit, and remain close to, 4 percent by the end of this year with her comments underlining that the bank is carefully watching whether this drop in inflation is only a temporary phenomena.
She highlighted that the bank's own internal research indicates that a nominal interest rate of around 6.5 percent would suffice if inflation stays near 4 percent. Its key rate is currently 9.25 percent after two cuts this year already.
"We have this elevated inflation expectation. They are not anchored, they're higher than our target. That's why we are trying to keep this toughness of our policy to achieve our target for medium term. Of course we see some inflationary risks related to the dynamic of oil prices – now they are quite high but who knows that dynamic of oil price is not very predictable we can say."
Overcome the effect of sanctions?
Moscow has become accustomed to tolerating U.S. imposed economic sanctions, Russia's central bank governor told CNBC in the exclusive interview. However, she added though the country requires robust structural reforms if its economy is to realize its potential.
"I think that the Russian economy has overcome this effect of (U.S. imposed) sanctions, it's sure. We see that our estimation that the Russian economy had turned to growth in mid-2016 and now it's stronger." Elvira Nabiullina, governor of the Central Bank of Russia, told CNBC.
"But we think that the potential growth is not very high - it's about 1.5 to 2 percent… I think that we need some comprehensive economic policy with coordinated monetary policy, fiscal consolidation policy and robust agenda of structural reforms," Nabiullina added.
Russia is currently enduring the sharp end of tough international sanctions from Washington as a result of its annexation of Crimea and has been accused of destabilizing eastern Ukraine.
However, at last week's G-7 meeting, members stated in a communiqué that sanctions could be rolled back if Russia meets its commitments in the Minsk Agreements and that the G-7 were willing to work with Russia on regional issues.
While Nabiullina suggested that Russia's economic situation had been improving of late, policies which could create more incentives for businesses to invest in the country should become a priority.
When asked whether she would describe herself as optimistic over the potential implementation of economic reforms, Russia's central bank chief said, "The situation is improving… I think it will continue to improve further."
Russia emerged from a two-year recession at the end of 2016 though economic growth remains reasonably limited and significantly below the 3 percent target set by its government. Its economy grew 0.5 percent in the first quarter year-on-year, Reuters reported in May, citing data from the Federal Statistics Service.
Moscow's economic challenges are well documented. The country remains over-reliant on oil and gas exports, it struggles to attract investment to modernize its infrastructure and productivity languishes at low levels while its labor force diminishes.
"I think for longer term perspective to have a higher rate of growth we need to resolve some structural bottle necks," Nabiullina said, before adding, "Every country has their own agenda (regarding) structural reforms and Russia has the same bottle necks that we need to overcome."