By Raising the Rate by 0.5% the Russian Central Bank Demonstrates Its Intension to Lower the Rate of Inflation

 On July 25, the Board of Directors of the Central Bank of Russia has taken a decision to raise the key rate from 7.5% to 8.0%.


It is to be reminded that the key interest rate has been raised for the third time in 2014: on March 3 it was increased from 5.5% to 7%, while on April 28, to 7.5%.


First of all, that decision points to strategic priorities of the Central Bank of Russia. In conditions of weak and volatile economic dynamics, the Central Bank of Russia could prefer monetary easing to stimulate growth. The more so, the estimates of the so-called output gap by economists of the Central Bank of Russia are negative ones and that factor is a case in favor of cuts in rates.


However, the monetary authorities preferred tough monetary measures in order to check the inflation rate and reduce it to the target level of 4% in the mid-term prospect. The above points to the fact that the management of the Central Bank of Russia is pursuing its main objective, that is, to ensure stability in the monetary area.


The monetary authorities are seriously concerned that inflationary expectations heated up by the devaluation of the beginning of the year, political uncertainties and increases of taxes which are currently discussed in the government may trigger off a new upswing of the rate of inflation. By increasing the rate by 0.5% and declaring that growth in rates will continue if inflation risks prevail, the Central Bank of Russia is sending a signal that it intends consistently to check the inflation rate and takes into account inflationary expectations in its decision-making.


It is to be noted that in general the decision of the Central Bank of Russia on raising the key rate by 0.5% does not look like a tough measure of the monetary policy, but sends a signal to market players that the monetary authorities are prepared to continue a tough monetary policy in future, which factor, in its turn, helps stabilize inflationary expectations.


Yevgeny Goryunov, Researcher of the Monetary Policy Department