The CBR’s Decision to Preserve the Key Rate is Fairly Reasonable

On September 12, the Central Bank of Russia made a decision to preserve the rate at the level of 8% though it does not exclude further growth in rates if inflationary expectations consolidate at a higher level and there is a risk of the rate of inflation not falling to the target level of 4% in the mid-term prospect.

The above decision was expected and appears fairly reasonable in the existing situation. Despite low economic growth rates, the rate of unemployment is still low, while capacity utilization is rather high. In such conditions, monetary easing will not be effective, nor will permit to return to a 3% growth.

If there is a serious risk of an economic slump and dramatic growth in the rate of unemployment, reduction of the rate will be advisable, but so far such developments seem unlikely. On the contrary, in a satiation of international tensions, depreciation of oil prices and risks of further sanctions there is appreciation of foreign currency which translates into growth in consumer prices and requires toughening of the interest rate policy.

The goal to reduce the rate of inflation to 4% by the end of 2016 – which goal was set by the CBR in accordance with the June Report on the Monetary Policy – is hard to be achieved for objective reasons. To reduce the rate of inflation from the present 7.7% to 4% within two years, radical growth in rates will be required and that situation may result in a serious economic slump. The target of 5%–5.5% on the basis of the results of 2016 appears more realistic.

The intension of the Ministry of Economic Development to introduce the procedure for approval of the inflation target between the Central Bank of Russia and the government causes some concern. It is inadmissible that the inflation target is imposed on the Central Bank as such a practice limits its independence from the government.

Yevgeny Goryunov, Researcher of the Monetary Policy Department