Russian inflation will not exceed 11 percent in 2005 and will meet the government's increased target range of 11-11.5 percent, central bank deputy governor Alexei Ulyukayev said on Monday, expressing disappointment the rate was not lower.
"We have not achieved our main goal this year - we could not keep inflation at our initial target level," Ulyukayev told a news conference on Monday.
Russian officials had to revise their official inflation target twice this year from the initial 8.5 percent. Inflation was 11.7 percent in 2004.
According to Ulyukayev, Russia's consumer prices had risen 10.5 percent by December 19 and would not rise much more before the end of the year.
The main pre-condition for curbing inflation in 2006 was strict control over budget spending, Ulyukayev said, - a tough task given growing demands to spend windfall oil revenues on improving life for ordinary Russians.
The government is targeting 8.5 percent inflation in 2006.
Russia, the world's No 2 oil exporter, is struggling to smooth the negative effects of massive foreign currency inflows that create an upward pressure on the rouble and make Russian industry less competitive.
AT A CROSSROADS:
The central bank buys up petrodollars to keep the rouble exchange rate competitive, but money supply is growing at an inflation-stoking rate of 40 percent while gold and forex reserves have risen by $50 billion in 2005 to a record $173 billion.
With inflation running in double digits and the central bank keeping the nominal exchange rate stable, the rouble's real effective exchange rate - a competitiveness gauge calculated using nominal exchange rates and price levels in Russia and its trading partners - is growing fast.
Ulyukayev said the real effective rouble growth rate would amount to 10.5 percent in 2005, a sharp rise from 4.7 percent in 2004.
Abundant liquidity has pushed Russia's volatile money market rates down while making it hard for the central bank to use its refinancing instruments to steer the economy.
However, Ulyukayev saw the trend changing in 2006 as more Russian banks borrow from the central bank through its repo operations.
"We are at a crossroads, big changes are happening. They are caused by the transition from sterilisation policy to liquidity management," Ulyukayev said.
The central bank has cut its refinancing rate, mainly used for overnight landing and currency swap operations, from 13 to 12 percent effective from today.
Commercial banks rarely borrow from the central bank at this rate which nevertheless often serves as a reference rate for overdue payments by banks and companies.
"We are going to continue to pursue a policy of lowering the refinancing rate depending on the success of measures to control inflation," Ulyukayev said.
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