Inflation Debate: Should the Central Bank Change Its Target?

The closer we get to June 6, the day of the Central Bank's next meeting on the key rate, the more heated the economic discussions about the level of inflation in the country and the timing of its possible slowdown. Recently, prominent figures in the economic bloc have expressed their weighty opinions on this topic: the head of the Ministry of Economic Development Maxim Reshetnikov and the deputy general director of the Center for Macroeconomic Analysis and Short-Term Forecasting Dmitry Belousov. Their opinions on the situation with prices in the country differed significantly.

The Minister of Economic Development admitted that the economy has entered a period of cooling after high growth rates in the previous two years. And inflation is noticeably slowing against this backdrop.

And Dmitry Belousov (not only a well-known economic analyst, but also the brother of the Minister of Defense) believes that the Central Bank should raise the inflation target from 4 to 7%. This would allow for a transition to a softening of monetary policy.

It is appropriate to recall here that the Central Bank set the goal of reducing inflation to 4% per year back in 2015. And two years later, the inflation rate of 4% was officially fixed and, like a guiding star, remains a guideline in the regulator’s monetary policy.

But the official inflation is currently hovering around 10%. And the question arises: why set a goal that is clearly beyond our reach? However, many experts - economists supported the regulator in its ambitious plans. They say that if you do not set ambitious goals to curb prices, they will continue to grow abnormally...

But ambitions are one thing, and harsh reality is another. And they are as follows: in Russia, with inflation at 4%, nothing is working out either. Every year, this goal, like a mirage, is pushed back. And now, according to the updated forecast of the Central Bank, inflation this year will not be the desired 4%, but 7-8%. But already in 2026, according to the regulator's plans, it will be the cherished 4%. Although few analysts believe in this.

- Could the proposal to the Central Bank to set a higher and more realistic inflation forecast somehow change the situation with prices?

- Fundamentally, little will change, - believes Igor Nikolaev, chief research fellow at the Institute of Economics of the Russian Academy of Sciences. - After all, today even the government expects annual inflation of 7.6%.

- Why is the Central Bank’s inflation target 4%, and not, say, 3 or 5%?

- According to established world practice, it is believed that if inflation is around 4%, then the economy is developing steadily and does not stop growing. But the problem is not whether it is 4% or 7%, but in the factors that predetermine high inflation.

- Can you tell us more about them?

- The main fundamental factor is large-scale monetary stimulation of the economy. On the one hand, without such pumping of money we will not achieve economic growth. But this process has an inevitable negative consequence - growth of inflation. Budgetary stimulation is temporary. However, in our situation we cannot limit budget expenditures. If so, then there is no effective fight against inflation.

This is the main, but not the only reason. There is also the indexation of tariffs of natural monopolies, uncertainty of the general economic situation... In conditions when business does not know exactly what will happen tomorrow, it tries to hedge its bets and "just in case" raises prices to the maximum. We see this on the shelves in stores.

- According to the updated forecast, the Central Bank expects annual inflation to be within 7-8%. In your opinion, is this realistic?

- I don't think so. In less than a month, we are expecting a powerful increase in housing and communal services tariffs - almost 12% at once. From last year's experience, we know how the growth of utility tariffs can accelerate inflation. Let me remind you that the planned increase in the key rate from 16% to 21% began at the end of July 2024, after the increase in utility tariffs.

Let's not forget that the budget deficit parameter for 2025 has already been revised. It has been increased from 0.5% of GDP to 1.7% - three times. This means that without a weak ruble, it will be extremely difficult to implement the budget for the year. This means that the ruble will begin to weaken, and this is an inflationary factor. In general, in my opinion, if inflation remains at 10% by the end of the year, this will be a good achievement.

- Will the Central Bank lower the key rate on June 6 or leave it at the same level? A month ago, most experts were inclined to think that the "key" would remain the same. And today, many are expecting it to be lowered. What do you think?

- The grounds for lowering the key rate seem to have appeared. However, the slowdown in inflation is still symbolic. And the inflation expectations of Russians in May rose to 13.4% compared to April, when they were 13.1%.

Let's imagine that the regulator lowers the key rate in June, and at the end of July, when another price surge occurs, it will have to be raised again. It will be a mess, which will introduce even more uncertainty. The Central Bank has a reasonable approach to this issue and will most likely leave the key rate at 21%.