18 May 2023 15:44

There is potential for reduction in inflation target, but consequences of 2022 require additional discussion - Central Bank

MOSCOW. May 18 (Interfax) - The issue of reducing the inflation target in Russia requires additional discussion, and there is potential for lowering the target in the future, according to a report for public consultations on the monetary policy review prepared by the Bank of Russia.

Significant adjustments to how the Central Bank assesses the possibility of lowering the target at the current stage were made because of the events of 2022, namely the increased uncertainty of external conditions and the beginning of the process of structural adjustment of the economy, which may require more significant shifts in relative prices over the medium term. "Therefore, an additional analysis and a comprehensive discussion of the possible terms for reducing the level of the inflation target is justified," the Central Bank notes.

"Despite the existence of space for lowering the inflation target in the future, at present, when making a decision, it is necessary to take into account the remaining increased uncertainty in the development of the situation in the Russian and global economies," the Bank of Russia said.

Now the inflation target is formulated at near 4% permanently.

Studies showed that, as confidence in the Bank of Russia's monetary policy grew in 2021, the experience in inflation targeting was gained, and inflation generally declined, as conditions developed for lowering the inflation target to 3%, the report says.

In addition, polls show that inflation of 4% or below corresponds to a sense of "comfort" in the perception of the population and among businesses. "This means that a change in the level of the inflation target in the future is possible only if it moves in the direction of reduction," the Central Bank said.

The success of lowering the inflation target in the future will largely depend on informing the public early about the new target level, the sequence of monetary policy and coordination with the Russian government, the Central Bank said. "This means that if a decision is made, it is necessary to announce a new target level several years before the transition, discuss the issue of transition with the government of the Russian Federation, including in terms of regulated tariffs, administered prices and adaptation of legislation," the Bank of Russia said.

The Central Bank also came to the conclusion that the arguments for using a point as an inflation target type remain valid, and that target variants with a range do not show clear advantages.

In addition, the Central Bank maintains that the best possible indicator for inflation targeting is still the consumer price index (CPI), although it is not ideal. "At the same time, one direction for further improving the Central Bank's practices may be the more regular use of various indicators of stable inflation in communication," the report says.