Skip to main content
  • Inflation Targeting in Russia

    16.06.2017 | Comments | Economy | 330 Daniyar Nurbayev

    In his research, Fischer (1996) noted that long run price stability should be the main goal of a central bank, and he stated that there could also be some other goals of a central bank, such as achieving full employment and output growth. This idea is popular among the economists (Fischer, 1996; Goodfriend & King, 2001; Bernanke, 2006) and this popularity stems from the desire to eliminate the costs of inflation, which hinders economic sustainability (Dotsey & Ireland, 1995). As the costs of inflation are dangerous for an economy, it is advantageous for a central bank to maintain price stability. Therefore, most central banks around the world started to implement price stability oriented monetary policies instead of policies that focused on fixed exchange rate, economic growth or unemployment. One of these policies was the inflation targeting policy.

    In 1990, New Zealand was the first country, which adopted this policy. Later, in the early 1990s countries such as Canada, United Kingdom, Australia and Sweden also adopted this policy. These countries were able to achieve price stability after the adoption of inflation targeting and during the period from 1997 to 2002, 15 developed and developing countries adopted this policy. Today 30 states have adopted the inflation targeting policy. Kazakhstan (in August 2015) and Russia (at the beginning of 2015)[1] adopted the inflation targeting policy. Russia was the first country in the Commonwealth of Independent States (CIS) that adopted the inflation targeting policy.

    It is important to note that the timing of the adoption of the policy was inconvenient for Russia. Russia adopted the policy after oil prices went down and sanctions were imposed by Western countries on Ukrainian/Crimean crisis. However, it was a long lasting plan, and if the state failed to adopt the policy at that time, the adoption process might have prolonged to another 5-10 years. Low oil prices, and the sanctions had a negative effect on the balance of payment of the country, which in turn negatively affected the country’s exchange rate. Therefore, the country had to abandon the fixed exchange rate policy and adopt the free-floating exchange rate policy, because if the country had not adopted the new policy, it could have used most of its foreign currency reserves to maintain the fixed exchange rate. Thus, after the adoption of inflation targeting, the Central Bank of Russia (CBR) stopped pointing any targets on exchange rate[2]. In addition, the adoption of the new policy means that the central bank does not set quantitative targets for other economic indicators, including economic growth rates.

    In its Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017[u1] , the CBR notes that it plans to decrease the level of inflation to 4% in 2017. However, the bank notes that the level is for medium term (1.5-3 years) and in short term inflation can deviate by +/-1.5%. It is worth mentioning that in its Guidelines for 2014[ПO2] ,[u3]  2015 and 2016[3] the CBR was planning to decrease inflation down to 4% in 2016, but the external factors did not allow to reach that level.

    Figure 1: Inflation, consumer prices (1996-2016 annual %)

    Source: The World Bank

    According to the World Bank (WB), the inflation rate in the country in 2016 was 5.4% (see Figure 1), while in 2015 the inflation rate was more than two times higher (12.9%). Despite the fact that the CBR increased its key rate[ПO4] [u5] [4] from 10.75% at the end of 2014 to 17.25% at the beginning on 2015, it could not keep inflation rate lower because of the significant devaluation of Ruble during the second quarter of 2014, which seriously affected the price of imported products. Ruble depreciated by 67.2% from 33.6 rubles per US dollar at the end of the second quarter of 2014 to 55.2 rubles per US dollar at the end of fourth quarter of 2015.

    In order to keep inflation low, the CBR had to keep the key rate high, but this policy had a negative effect on the economy. Hence, in the second half of 2015, the key rate was reduced to 11.25% and the bank kept it at this level up to the end of the second quarter of 2016, when the rate was reduced to 10.75%. Later during the second half of 2016, the CBR cut the rate by 0.5 percent point to 10.25%. During 2017, the bank reduced the rate two times. The bank reduced the rate in March by 0.5 percent points to 9.75% and in May by 0.5 percent points to 9.25%. It is possible that the CBR will not further reduce the key rate in 2017 because of the medium term goal of the bank to keep inflation in 4% range.

    In 2017, inflation is going down. In January 2017, the annual inflation rate was 5.04%, and it gradually decreased to 4.14% in April 2017 (4.6% in February and 4.25% in March). This data shows that the CBR can eventually reduce inflation at the end of 2017 to 4%. The Governor of the CBR, Elvira Nabiullina, told in February 2017 that it is possible that the bank can reach its goal, but she notes that it will be difficult because of some factors. We will discuss these factors in detail below.

    Currently, the country has low inflation rate mostly due to budget consolidation[5] and low economic activities because of the recession in the country. However, it is expected that in 2017, the economy will be gradually recovering. For example, the growth forecast of GDP for 2017 is 1%-1.5%. These growth rates might increase inflationary pressure. It is also important to note that if the extinction of the oil freeze agreement among the OPEC and non-OPEC countries will have a positive effect on oil prices until March 2018, the economy might grow with higher pace, which might increase inflation in the country.

    Another factor that might have a negative effect on price stability is the fact that the Ministry of Finance of Russia announced on January 25, 2017 that it would make interventions in the foreign exchange in order to stabilize the economy. It was noted that the Ministry would buy foreign currencies in the market. It is important to point out that by buying foreign currency the Ministry increases liquidity in national currency, which will increase inflationary pressure. Therefore, this decision of the Ministry contradicts with the goal of the CBR to maintain inflation at 4% level.

    Overall, this year will be critical for the CBR. Several factors might have an adverse effect on price stability, while the CBR has to reach its goal of 4% inflation rate to maintain its credibility. In my opinion, during this year, the CBR will not make any significant reduction in its key rate or even will keep it on its current level to be able to fight back the factors that may trigger inflationary pressure.


    [1] Guidelines for the Single State Monetary Policy in 2015 and for 2016 and  2017

    [3] Guidelines for the Single State Monetary Policy in 2014 and for 2015 and 2016

    [4] The main transmission mechanism of the monetary policy of the CBR. It is a minimum or  maximum interest rate at which commercial banks can submit their bids to one-week auctions to provide (absorb) liquidity. The auctions are 1 to 6 days REPO auctions, 1 to 2 days Foreign exchange auctions and 1 to 6 days deposit auctions.

    [5] For instance, the public social expenses to GDP is planned to decrease from 12.7% in 2016 to 12.2% in 2017, while expenses on National defense to GDP, expenses on National economy to GDP, expenses on Education to GDP are planned to decrease from 7.2%, 4.5% and 3.7% in 2016 to 4.9%, 3.9% and 3.5% in 2019 respectively.

    [u1]It is an exact title from the Guideline, you can see it from

    [ПO2]You mentioned before inflation targeting policy started at the beginning of 2015

    [u3]Yes, indeed, it started in 2015. The guideline was not about inflation targeting, but it was about monetary policy of the bank at that time (i.e. 2013 when the guideline was published) and future prospects of its policy. The main point is that in 2013 the central bank planned that they will adopt inflation targeting in 2015, and will decrease inflation to 4% in 2016.

    [ПO4]You mean base rate of interest ?

    [u5]Yes, it is base rate. I used ‘key rate’ because the CBR itself uses the term.  

    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy

    Tags: Russia, Economy, Inflation Targeting


  • Junior Research Fellow

    Daniyar Nurbayev

    Daniyar Nurbayev is a research fellow at the Eurasian Research Institute. Daniyar completed his bachelor’s degree in Finance in the Kazakh-British Technical University in 2013. In addition, he holds Masters degree in Finance from the Kazakh-British Technical University (2015).