The head of Russia's central bank rebuffed a call on Thursday by President Vladimir Putin to ease monetary policy, saying interest rates should only fall as progress is made in bringing down inflation.
Mr. Putin, who returned to the Kremlin last May for a third presidential term and has been Russia's most powerful politician since the turn of the millennium, has long been used to getting his way.
But, despite adding his voice to a crescendo of calls from top officials and business leaders for interest rate cuts to boost a flagging economy, Mr. Putin drew a calm rebuttal from Sergei Ignatyev, the veteran chairman of the Bank of Russia.
Speaking at a Kremlin meeting broadcast live on state TV, Mr. Ignatyev said interest rates should follow inflation down from over 6 per cent to expected levels of 4 per cent or below "in the next few years."
"Interest rates will fall, perhaps not straight away, perhaps with a delay. But, as inflation falls, interest rates will fall," the 65-year-old central banker said.
Mr. Ignatyev, who retires in June after 11 years at the helm, said the government would have to uphold fiscal discipline to open the way for future interest rate cuts.
Mr. Putin has yet to select Mr. Ignatyev's successor – he is expected to do so in March – and the jury is out on whether he will pick a hawkish guardian of inflation-fighting or a more dovish advocate of monetary stimulus for Russia's $1.9-trillion (U.S.) economy.
"This political pressure is reaching its peak right now, with the most powerful person in the country," said Ivan Tchakarov, chief Russia economist at Renaissance Capital in Moscow.
The central bank's last interest rate move, in September 2012, was upward. Inflation, which ended the year at 6.6 per cent, is above target – the range tops at 6 per cent – and may rise to 7 per cent in January, economists say.
Rate setters are concerned that inflation will spike further. They argue that economic growth in Russia, at around 3.5 per cent last year, is running close to a potential rate that has roughly halved since the economic slump of 2009.
Opening the meeting, Mr. Putin expressed concern that rising interest rates were cutting the flow of credit to the economy, whose growth slowed to an annual rate of around 2 per cent in the final quarter of last year.
"The rise in interest rates, to a level well above the rate of inflation, is a cause for concern," Mr. Putin said. "This will inevitably affect lending to the economy and citizens."
The central bank's key policy rate, the one-day minimum repo rate, now stands at 5.5 per cent. The refinancing rate, which is more symbolic but is closely watched by politicians, now stands at 8.25 per cent.
While RenCap's Mr. Tchakarov argues that a rate cut would be justified, he doubts that political pressure will sway the Bank of Russia, which is "about as independent as you can be in this country."
The debate over interest rates takes place as Russia's leaders attempt to hammer out a new growth strategy that would replace dependence on stagnating natural resource exports.
Prime Minister Dmitry Medvedev wants to boost growth to 5 per cent. The economic strategy he presented to the Kremlin meeting is short on credible structural reforms to achieve that goal, however, and has drawn unfavourable comparisons with the five-year plans of the Soviet era.
The rate of investment in the economy, Mr. Medvedev declared, must reach 25 per cent of gross domestic product by 2015 – up from just over 20 per cent at present.
The overwhelming thrust of the plan is not on measures to improve the investment climate, but on social objectives that Mr. Putin pledged in the series of "May decrees" he issued on his return to the Kremlin last year.
Yet the plan is vague on how the spending needed to achieve this long list of commitments will be financed.
"They are talking about some measures and instruments that the state will finance to reach certain goals," said Natalia Orlova, chief economist at Alfa Bank.
"The point is that the state has to stop injecting money and encourage the private sector to invest."