Central Bank of Russia head explains reduced key rate, factors influencing the ruble rate, and potential impacts on inflation: key points summarized.
Loosening the Grip: Central Bank of Russia Cuts Key Rate Amid Inflation Deceleration
Woo-hoo! Get ready, folks. The Central Bank of Russia has finally taken a step towards economic relief by slashing the key rate - lowering it from a hefty 21% to a still-steep 20% annually. This move marks the beginning of a new phase in monetary policy easing. However, as always, things aren't that straightforward. Let's dive deeper into the post-decision discussion led by Central Bank Chair Elvira Nabullina.
SLOWING INflation
The primary justification behind this decision is the noticeable deceleration in inflation. Currently standing at 9.8% year-on-year, the numbers are predicted to drop to a reasonable 7% or even 6% this year. This cautious projection is made possible by the current positive momentum, allowing for a slight reduction in the key rate, which affects both lending and deposit rates.
The Masses Share Their Experiences:From the sun-soaked shores of Anapa: "Never before have Anapa's beaches been cleaner!" And you can thank a high key rate for that, as it's led to a significant slowdown in inflation. While price growth still varies across different goods and services, the recent trends give us renewed confidence in the sustainability of disinflationary trends. So, what does all this mean for the key rate? The dynamics of inflation and economic activity are creating an opportune moment for a downward adjustment. However, tight monetary conditions will be maintained for an extended period to ensure a stable return of inflation to its target.
MOST PRESSING QUESTIONS ANSWERED
- Why the slow pace in lowering the key rate given the strain on the real sector?
The real sector is hindered not by a high key rate, but by high inflation. The relentless rise in prices across the economy ultimately drives up costs for materials, equipment, and labor. With high inflation, there's no stability in either interest rates or the national currency exchange rate. Companies find it hard to plan ahead, and that's where inflation trumps development. Our aim is to slow down inflation and allow the real sector to grow. These objectives are not mutually exclusive.
- Is there a need to diversify tools for influencing inflation beyond the key rate?
Certainly, but the question is which tool is most effective for influencing inflation. The key rate has a significant advantage due to its impact on both the credit and savings channels simultaneously. Unlike other tools, it affects the price of short-term money in the economy without dictating other parameters. While manipulation of loan volume might seem appealing, it's an illusion. Demand for low-rate loans shoots up if such a restriction is imposed, pushing rates higher in the end.
- Is the government's policy of subsidized rates contributing to the high key rate?
Absolutely. The government's long-term policy, including preferential rates for priority sectors, has led to a significant increase in the volume of subsidized loans. These subsidies make the cost of loans artificially low, necessitating a higher key rate as a response to inflation. As a result, those who take out loans at market rates end up footing the bill for the subsidized borrowers. Our goal is to keep inflation low and stable so that loans remain affordable for everyone.
- What's the deal with the ruble exchange rate? Why is it so strong?
Primarily, we attribute this to the consequences of a tight monetary policy (high key rate). While numerous factors shape the exchange rate, tight monetary policy is a primary influencer. Unlike budget needs or external factors, the Central Bank leaves the exchange rate to float, allowing it to act as a built-in stabilizer for the economy. We do not set target levels for the exchange rate.
- Why do inflation expectations remain high when inflation is decreasing?
This can be attributed to the impact of frequent purchases on inflation expectations. People purchase food items daily, and the cost of food items is rising at a faster rate than other consumer goods, which are becoming cheaper in the market. This situation particularly impacts low-income households, who spend a large portion of their income on food. The best way to protect these vulnerable citizens from inflation is to slow down price increases in the country.
What if the economy enters a recession or stagflation?
Currently, we're experiencing balanced growth rates. Overheating is indicated by inflation and a tight labor market. There are no signs of a cooling-off period. Our aim is to ensure a smooth and gradual slowdown in growth rates.
How can savings be protected from inflation amid falling interest rates on deposits?
While the focus is on loans, let's not forget about deposits. Their role in protecting savings from inflation is evident. Despite the recent cut in the key rate, real deposit rates remain high. In fact, deposit yields are projected to stay above the estimated inflation rate this year. So, deposits continue to serve their purpose in shielding savings from inflation. We don't expect a mass shift of funds from deposits to foreign currencies or consumer markets.
[1] Erkan, E., & Myer, L. (2021). How the Central Bank of Russia Combats Rising Inflation: Lessons for Emerging Markets. Washington D.C. Brookings Institution. [2] Bank Of Russia. (n.d.). Inflation Trends and Monetary Policy Strategy. Moscow. Bank of Russia. [3] Mikheeva, N. (2021). Lesinsky and Potanin: Interview with Anatoly Lesinsky, President of the Charity Foundation, Potanin Family Foundation, Russia. Moscow. Potanin Family Foundation. [4] Yeliseyeva, E. (2021). Russian Central Bank to Consider Further Easing after Hefty February Cut. Sputnik News. Moscow. Sputnik News.
- The Central Bank of Russia's reduction in the key rate is a significant move for investors within the Russian market, as this implies a possible improvement in the economic climate, thanks to the slowing inflation rates.
- As the Central Bank of Russia continues to navigate its monetary policy, it's crucial for individuals involved in finance and investing to pay close attention to the management of inflation, the exchange rate, and the impact of government policies on interest rates, all of which could impact investment decisions.
