In a commentary for Vzglyad, Evgeny Goryunov, Head of Monetary Policy Department at the Gaidar Institute, explained why a sharp reduction in the key interest rate in the Russian Federation could lead to hyperinflation, while in a number of other countries the rate could remain below 3-4% and stimulate economic growth.
"It all depends on the state of the economy. If it is working at the limit of its abilities – and this is often evidenced by low unemployment – then even a low rate will provoke an unchecked increase in inflation. This is exactly the situation in Russia, so lowering the rate to 3-4% is the way to the Turkish scenario. You don't even need to invent examples: Turkey, with its inflation rate of nearly 30%, is a vivid illustration of what can happen," said Evgeny Goryunov.
According to him, there is no such overheating of the economy in the USA and the EU as in Russia. Further, inflation expectations are low there unlike Russia, where the extent of lending does not decrease even amid a high key interest rate. "If the rate is lowered to 3-4%, lending will rise sharply, as well as prices," the expert added.
When asked to what level it is safe to lower the interest rate in Russia in order to stimulate economic growth and make loans more affordable, while preventing inflation from deviating from the target level of 4%, Evgeny Goryunov replied:
"It depends on the horizon. Over time, the rate in Russia may decrease to 7-8%, unless new macroeconomic shocks occur. At the moment, the Central Bank of Russia is keeping the rate at an elevated level in order to return the economy to a trajectory of sustainable growth. It is highly likely that it will remain like this for another 1.5-2 years," the expert believes.