Central Bank of Russia could begin cutting key rate in 2025 if inflation slows, absent any shocks - Nabiullina

MOSCOW. Nov 19 (Interfax) - Central Bank of Russia Governor Elvira Nabiullina does not rule out the regulator gradually cutting the key rate beginning in 2025 as inflation decelerates and absent any new external shocks.

"We believe that our policy should allow us to reduce inflation to 4.5%-5% next year, and then stabilize it at a level close to 4%. We will also consider gradually reducing the key rate as inflation slows. The reduction will begin next year if of course there are no additional external shocks," Nabiullina told the State Duma on Tuesday.

Nabiullina said there was a widespread opinion that raising the key rate only accelerated price growth, as it prompted higher borrowing costs, however this is a "profound misconception". "The key rate counteracts inflation effectively. If we had left the rate at the level it was at until the middle of last year, that's 7.5%, then inflation would not simply have been in double figures, it could well have reached 20-30%, and quite possibly even more," she said.

"Corporate interest expenses do grow when rates are high, but we must not lose sight of the fact that the ratio of interest expenses to production costs has not risen above 5% over the past five years. In general, the effect interest expenses have on inflation in the economy should not be exaggerated. But the cooling effect of tight monetary policy on excess demand and, subsequently, on inflation is far more considerable," Nabiullina said.

She said that when people say high rates increase the costs of enterprises, they often forget that growth for all business costs is a significant component of high inflation. "A much more serious problem for enterprises is when almost everything becomes more expensive: raw materials, components, logistics, equipment, labor. This reflects the consequences of a high inflation backdrop in the economy. If demand in the economy is excessive, then this galloping cost growth will be passed on to the end product," she said.

"The increase in interest expenses is a temporary phenomenon. They will fall again when inflation is overcome, but the increase in other operating costs due to high inflation, is, alas, here to stay," Nabiullina said.