Putin issues Russian economic warning

10th June 2013, Comments 0 comments

President Vladimir Putin warned on Monday that Russia's economic growth would slow down this year to less than the world average and ordered his government to act to reverse the trend.

The Kremlin chief's comments came moments after the central bank was forced to hold its main interest rate unchanged at 8.25 percent for the ninth month running in the face of inflation that has jumped to the highest rate for 21 months.

Putin confirmed at a cabinet meeting that Russia's growth would slow to 2.4 percent this year from its downwardly revised forecast of 3.6 percent.

The government had initially pencilled in 2013 growth of 5.0 percent.

"This is lower than the range necessary for sustainable development, for resolving social and other problems," said Putin.

"And second, this is lower than the IMF (International Monetary Fund) world growth forecast of 3.3 percent," Putin stressed in televised remarks.

Russia's economy has suffered from lower domestic consumption and declining industrial production rates.

Investment has also lagged as a partial consequence of Europe's economic troubles and concern about corruption along with the state's dominant economic role.

Russia's economy expanded 4.3 percent in 2011 and 3.4 percent last year -- a radical cut from rates that approached 9 percent prior to the 2008-2009 global financial crisis.

The government's inability to stimulate growth to earlier levels has frustrated Putin at a time when Russia is preparing to present its advances to the world at the 2014 Winter Olympic Games in Sochi.

The Russian leader suggested on Monday that investments could be stimulated by reaching into the pension fund and using those assets to lay the groundwork for select state projects.

The central bank has also been under intense pressure from ministers to lower rates in order to stimulate growth in a practice broadly adopted by the world's developed nations.

But the bank has been stymied by unexpectedly high inflation that in annualised terms reached 7.4 percent in May -- well ahead of the government's target of 5.0 to 6.0 percent.

"The maintenance of inflation above the target range over the course of an extended period may affect the expectation of the market, which is a source of inflation risk," the central bank cautioned.

It further noted that the overall economy "was indicating low growth rates."

The bank decided to leave the discount rate at which it repurchases government securities from the commercial institution steady at 5.5 percent while lowering some medium- and long-term borrowing rates.

Market analysts immediately read this as a sign of a probable easing of monetary policy in the months to come.

"The turn towards the coming easing is clear," BNP Paribas said in a research note.

"We reiterate our call that the first cut is likely already in July."

Renaissance Capital also predicting a July cut and noted that the bank had issued "worrying signals on economic growth."

The change in rate policy is expected to come just as outgoing central bank governor Sergei Ignatyev is replaced by Putin's new pick Elvira Nabiullina.

"Outgoing Governor Ignatyev has been consistently arguing against lowering rates in the past six months or so, but the arrival of Nabiullina should change the policy bias at the central bank to a more accommodating position," Renaissance Capital said.

© 2013 AFP

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