VOR: How would you comment on the inflation data released by the Central Bank earlier this week?
Natalia Orlova: I would say that it's a negative statistic first of all because the Deputy Minister of Economic Development was aiming for inflation of 0.6-0.7% for January. As a result, the fact that actual growth, reported by RosStat was at the 1% level, suggests that inflation was well above initial guidance and market expectations.
The acceleration in January has put the annual inflation rate to 7.1%. Just a reminder, in December annual inflation was 6.6%, so the increase is quite significant I would say. In general, the development puts a question mark over the Central Bank’s readiness to lower interest rates at the coming meeting. Most likely, the rate will be unchanged.
VOR: Do you expect the Central Bank to ease its monetary policy at some point this year?
Natalia Orlova: I think the reality is such that the Central Bank will have to support the economy, and I don’t expect the regulator will be able to withdraw its support for the banking sector. In the meantime, I think in terms of the interest rates I don’t expect a cut to take place in the first quarter for sure, and most likely in the second quarter. I assume the probability of a rate cut will be very modest though the first half of 2013. Maybe in the second half in the best- case scenario we will see a reduction in rates, since the Central Bank’s guidance doesn’t exclude this possibility. I think there is an understanding that the economy needs some sort of support from the monetary policy, but at the same time the economic reality dictates rather an increase in interest rates in the longer run.
VOR: How would you comment on the fact that the opinion of senior politicians and economists diverges so much on this issue? For example, Russia’s Deputy Prime Minister, Igor Shuvalov, has commented just recently saying that Russia needs the interest rate to be at the level of 7.25% rather than 8.25%.
Natalia Orlova: I think there is an illusion that we can accelerate economic growth by boosting consumption and boosting final demand. I assume that a number of state officials believe that cheaper money will guarantee faster growth. The situation in the banking sector, however, demonstrated that lower interest rates in the first half of 2012, pushed up capital outflow and had a very limited effect on economic activity. In light of this situation, I can reiterate my view that the core of the problem is really the efficiency of the real sector. The only way to generate faster growth is to create an environment in which private companies would be interested in coming to Russia to develop their businesses here.