Here’s What Putin Wants From Central Bank as Elections Near

Central Bank of Russia file photo

(Bloomberg – – Anna Andrianova, Andre Tartar – July 5, 2016)

Helping your president win elections doesn’t have to compromise a central bank’s independence, at least not in Russia.

Monetary policy is aligning with politics before Vladimir Putin’s biggest test at the ballot box since he returned to the presidency in 2012. By claiming the upper hand in the fight against inflation, which is feared by more Russians than crime, health problems and religious conflict, Putin and his allies can rally support in the run-up to a parliamentary election in September.

That means fewer hurdles for the central bank as it pursues what it’s called a “moderately tight” policy, cutting interest rates once in the past year amid a recession and focusing on its 4 percent inflation target in 2017. While annual price growth climbed to 7.5 percent in June after stalling at 7.3 percent for three months, the central bank forecasts it may end the year as low as 5 percent, less than a third its 2015 peak. The median of 17 estimates in a Bloomberg survey was for prices to grow 7.4 percent last month.

“The central bank’s task in the election cycle in Russia is to ‘present’ to the president a victory over inflation,” said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “From this political angle, a continued bias towards tighter policy seems to make sense.”

The central bank won’t loosen its policy as the new electoral cycle kicks off, according to almost two-thirds of respondents in another poll. The Bank of Russia will leave its key rate at 10.5 percent when it meets on July 29 after a 50 basis-point cut in June, according to 10 of 14 economists surveyed by Bloomberg.

Policy makers said last month they’ll “consider the possibility” of further easing if inflation is in line with forecasts and based on estimates of risks to price growth. Forward-rate agreements are signaling 57 basis points of decreases in borrowing costs during the next three months. The ruble traded 0.5 percent weaker at 64.23 against the dollar as of 3:58 p.m. in Moscow.

“The central bank will not necessarily grow more accommodative just because of politics or political uncertainty,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “It is unlikely that over the next two years much political change is going to happen in Russia anyway. And the central bank knows that.”

Mission ‘Possible’

As support for the ruling United Russia party falls to the lowest this year, Putin has embraced the price goal as “possible” in the medium term. In modern Russian history, the annual price index was near or below 4 percent for only six months in 2012, when authorities pushed back annual increases in utility tariffs.

While price growth has eased to the slowest since April 2014, inflation expectations have remained elevated. The share of Russians who consider inflation to be the biggest challenge facing the country was at 11 percent in April and May, more than doubling from March, according to a poll by the state-run polling company VTsIOM.

Even as support for the president and the ruling party weakens, United Russia is still 20 percentage points ahead of its nearest challenger and Putin’s approval rating is 80 percent. Still, with millions sinking into poverty and wages failing to recover, authorities will come under pressure to loosen fiscal policy. The central bank has already singled out the budget as a source of risks for its inflation outlook.

Before the past three national elections, the central bank has either held or increased its benchmark rate. The next presidential vote is scheduled for 2018.

“The 2018 elections is the event that could force the central bank to pursue tighter — but definitely not easier — policy,” said Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow. “Even a tighter budget could potentially have increases in particular spending, such as state wages, which could be a concern for the central bank.”

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