Russian inflation is bearing down so fast on the central bank’s target that it’s likely to shoot past the 4% goal, a new challenge for policy makers looking to use stable and low price growth to anchor expectations and encourage investment.
If deviations above or below target are “sustained and significant” enough, the Bank of Russia will act to bring inflation back near 4%, First Deputy Governor Ksenia Yudaeva told reporters in Moscow on Tuesday. For derivatives traders, the takeaway is that little now stands in the way of deeper monetary easing, with wagers for rate cuts in the next three months near the highest in a year.
“Inflation may well deviate in either direction,” Yudaeva said. “Some of these fluctuations may fade by themselves.”
Already beating steep odds by turning inflation around from a 13-year high of almost 17% just two years ago, the central bank now has to contend with a dilemma that’s equally daunting. Complicating the task, people’s expectations for prices, a key concern for policy makers, continue to zigzag from month to month and uncertainty prevails on the oil market. The Economy Ministry is also forecasting a “serious weakening” in the rouble through the rest of the year, threatening to eliminate a major factor for the surprise deceleration in prices.
Yudaeva said inflation is currently running at about 4.2-4.3%, calling the data “very encouraging.” Still, the median value of inflation expectations for a year ahead remains at almost triple the target, although it declined in March after a pickup in February.
Against the background of weak consumption, price growth is even turning negative in segments of the retail market. X5 Retail Group, the country’s largest grocery chain, has said that deflation is affecting goods across as much as a fifth of its offerings this year.
The share of Russians who say that prices will grow slower or even start to decline increased to 25 to 30%, compared with a drop to 10% for those who expect an acceleration, according to Marina Krasilnikova, head of the department on research into consumption and living standards at the Levada Center, an independent polling organisation in Moscow.
“Expectations for an inflation slowdown significantly exceed expectations of an acceleration” during the past 12 to 18 months. Krasilnikova said. “That’s a result we haven’t had for 25 years.” One of the key issues the central bank is monitoring is the extent to which its “moderately tight” policy encourages savings, which it considers a critical resource for investment.
While the savings ratio dropped to 11.3% of incomes last year, down from 14.1% in 2015, it remains far above the 4-5% level the central bank considers “alarming” for inflation, according to Igor Dmitriev, head of its monetary policy department. 
Russia hasn’t been near that threshold since 2008.
At 8-10%, the consumer still remains in “saving mode,” and even a share of as low as 6% is “normal” when the economy is recovering, Dmitriev said in an interview last month. 
The goal is to anchor consumer-price growth at 4% in the medium term, policy makers said March 24 after cutting their benchmark interest rate for the first time since September to 9.75%. Forward-rate agreements signal 77 basis points of decreases in borrowing costs over the next three months, up from March’s high of 49.
After moving in 50 basis-point steps for its prior three reductions, the central bank switched to a quarter percentage- point decrease last month for the first time since the key rate was introduced in September 2013. But disinflation has been so rapid that it “calls for an immediate response,” economists at Sberbank CIB said in a report. 
Proceeding with smaller cuts may be a mistake because it ensures high carry-trade inflows by keeping borrowing costs elevated, according to the investment arm of Russia’s largest lender.
 “This could lead to excessive volatility down the road, as there will come a time when investors start taking profit,” Sberbank CIB analysts including Anton Stroutchenevski said.