A Lower Key Rate To Boost Competition

The Bank of Russia Board of Directors at its meeting held on Friday, 27 October decided that the key interest rate should be reduced by 0.25 p.p. - to 8.25% per annum. In this connection, the Bank of Russia does not rule out the possibility of the key rate being further reduced at one of its next meetings.  

In spite of the temporary recovery observable over Q2-Q3 2017 across the Russian economy, the risks of a growth slowdown are still lingering. So, it has become obvious that the key interest rate needs to be further reduced in order to sustain the unstable growth rate. An optimal interest rate should be somewhere at 5–6%.

On the one hand, with regard to some food commodity groups one can see a declining inflation rate, or ever deflation. On the other, real disposable income continues its downward movement, thus imposing significant constraints on economic growth through reducing demand.

Since March 2015, inflation has been stably on decline, but this is actually an institutional decline as producers have been adjusting to the plunging demand for their products. Even trade networks have preferred to put up with losses and reduce their prices rather than to lose their market share.

At the same time, low inflation has created a somewhat atypical situation for businesses, in response to which they have to more aggressively adapt to their competitive environment, because a reduced key interest rate boosts competition and generally improves the institutional background.

Low interest rates and a stable exchange rate represent a set of tools that is sufficient for stimulating the economy.

Alexey Vedev – Leading Researcher of the Gaidar Institute