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Slowing Russian growth sets up interest rate fight

Russia’s economy grew at the slowest pace in at least three years in 2012.

High oil prices meant there was no budget deficit for the world’s biggest energy exporter, but the Kremlin now wants lower interest rates to boost growth and Russia’s central bank is not keen on that means of monetary stimulus.

Gross domestic product expanded by a weaker than expected three point 3.4 our percent last year, down from 2011’s 4.3 percent.

The Russian government’s forecast is for 3.5 percent growth this year.

Speaking at a government meeting in Moscow, President Vladimir Putin said the country cannot return to its “pre-crisis growth model” and needs to reverse the recent fall in investment: “If we want to be competitive, if we want to resolve the social problems, Russia’s economy has to grow faster that the global economy. At the same time we have seen a slowdown of the Russian economy in the last two quarters of 2012. So, the rate of industrial output growth has fallen below two percent in annual terms, while fixed capital investment is slowing too.”

Putin wants to boost the flagging economy by replacing Russia’s dependence on stagnating natural resource exports – particularly oil and gas – with aggressive stimulation of investment demand.

Key to that is cutting interest rates, which the head of Russia’s central bank and the IMF have said is not a good idea.

Speaking at the Kremlin meeting broadcast live on state TV, Sergei Ignatyev, the veteran chairman of the Bank of Russia, rebuffed Putin and said interest rates should follow inflation down from over six percent to expected levels of four percent or below “in the next few years”.

The central bank’s last interest rate move, in September 2012, was upward. Inflation, which ended the year at 6.6 percent is above target – the range tops at six percent – and may rise to seven percent in January, economists say.

Copyright © 2014 euronews

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