Russian president pledges no pressure on central bank

By bne IntelliNews March 12, 2013

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Russian President Vladimir Putin moved to allay the worries surrounding monetary policy and the upcoming succession at the Central Bank of Russia on March 11, claiming that the Kremlin will not force a rate cut on the regulator.

"Of course, we must push all economic structures of the government to push economic growth forward," Putin said, according to Prime. "But the central bank has its special goals, and while pushing the central bank to joint work, we must not overburden it with functions that are alien to it."

The government has been howling for a rate cut to boost economic growth which has been collapsing in recent months. GDP expansion fell to a mere 1.6% in January, a long way from the 5% or so that the economy was adding a year previously.

However, the CBR is sticking to its inflation focus, and has refused to consider a cut in the benchmark overnight rate, which at 8.25% is one of the highest of any emerging market. The CBR insists that the economy is already running at close to full potential, and therefore all that easing would achieve is to fuel inflation, which is already at around 7% and well above the CBRs target range of 4-5%. The fact that Russia's factory capacity utilitistion rate is estimated at 105% backs up that view.

Putin suggested that he has been convinced. "The Russian government must not force the central bank to reduce the refinancing rate," the president said. "We are counting on the support measures currently being developed by the government to be a sufficiently consistent policy for the requirements of the consumer market and to fulfill their role."

The comments come as speculation continues over who will replace Governor Sergei Ignatiev, whose term expired in January and has to be replaced by June. The fear is the new governor will listen more closely to the Kremlin and erode the CBR's independence. Putin's comment that the Kremlin will not force a rate cut on the central bank would of course stand should the new governor make such a decision independently.

However, the latest betting is that the president will give another hawk the nod. Many names have been put forward, and the market still hopes that Deputy Governor Alexei Ulyukayev will be given the job. However, Putin said on March 7 that he intends to nominate a "surprise" candidate, hinting that it would be an appointment that the market will "like". That saw the betting focus on former economy minister Elvira Nabiullina. Currently Putin's advisor on economic issues, Nabiullina is seen as a conservative and would likely continue the CBRs hawkish policies.

Her appointment would also give the reform agenda a fillip. Not only was Nabiullina a leading proponent of reform efforts during her time in government, but without the easy out of accommodative monetary policy, the Kremlin will find it ever harder to resist taking the harder path of pushing ahead with reform.

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