CNBC Interview of Elvira Nabiullina, Governor of the Central Bank of Russia.

Interview by Geoff Cutmore

Signal that rates will not be reduced further this year taken up by the markets

“…through the signal stating that this year that we will not be reducing the rate, and unlikely to be reducing it before the start of next year, we wanted to tell market players about our position that the trajectory of the reduction of the key rate is going to aimed precisely at achieving our inflation target. Therefore, we were able to see after our decision that market players were able to adjust their expectations slightly and the yield curve moved upwards slightly and inflationary expectations subsided.”

…but circumstances can force their hand

“We have been saying that a reduction in the rate is very unlikely. But of course if any extraordinary events occur. For example if there is a much higher oil price because of certain other circumstances or drivers which suggest that the overall economic dynamics and inflationary dynamics will be better than those used for our base scenario, which of course can happen. However, we do not see a high probability of these sorts of events unfolding.”

On inflation in Russia

“It is indeed true that inflationary expectations remain fairly high, they are in decline, but they remain above the level that would meet our inflation targets. In many ways this can be explained by the psychological factor because people in Russia have grown used to living in a high inflation environment. ”

Recovering wages with consumption expected to follow

“…we see that wages are recovering, but real income growth remains fairly low and the population is continuing to demonstrate a model of behaviour inclined towards saving. Consumption will doubtless gradually recover and start to grow but it is very important for us that these economic dynamics for consumption growth are not stimulated by inflation but are accompanied by an expansion of production that won’t lead to a growth in prices.”

They expect slower economic growth and high volatility

“We are proceeding from the premise that the global economy is going to grow at a low tempo. And at the same time there will be quite high volatility, the risk of high volatility in the financial markets. The era of cheap money has indeed has led to the kind of situation where financing and investment was put into projects with low productivity, which all things being equal and under tougher monetary conditions would not have been financed. And this has led to a situation whereby almost throughout the whole world we see a very low rise in labour productivity in the leading economies. And this is a reason behind the risk of economic growth becoming very slow.”

Cautious moves from central banks because of sensitive markets

“…the central banks of many leading economies seeing the response of the market and their very high level of sensitivity, do try to follow a very moderate, cautious policy, trying to manage expectations and to create as few surprises for the markets as possible…it’s very important that there aren’t any surprises because the response from the markets could be very sensitive.”

The situation in Russia is different from the rest of the developed world’s

“…as far as the Russian economy is concerned, we find ourselves in a totally different situation. Unlike many other countries we have high inflation, we have high interest rates, we still have the option of lowering them…the task facing the Central Bank of Russia is different.”