Russia's central bank tightens monetary policy, government to go along
The central bank`s decision to increase the interest rates was not a surprise: it started toughening monetary policy last December by raising the interest rate it pays on deposits. From that time the problem of consumer price surging have been becoming increasingly acute. A high inflation level (9.7-10% per annum) prompts monetary authorities to take further steps. In the wake of the recently taken measures - raising reserve requirements and deposit interest rates -- the latest increase of all central bank-controlled interest rates appears quite logical. The indicative refinancing rate will be 8% (up by 0.25) from the beginning of March, the minimum interest rate on overnight repos is 5.25%, and reserve requirement have been increased to 3.5-4.5%. The deposit interest rate does not depend on the term and is set at 3%. Although raised, all interest rates remain negative in real terms. Russia is in the group of economies that are tightening their monetary policy - BRIC, Turkey and Israel.
We consider that moderate and gradual tightening of the monetary policy will not hurt economic growth that now almost does not depend on the lending supply. Inevitable rise of interest rates on the debt market will not have a strong impact on the balance of payment; compared to the effect of high oil prices, interest rates differentials remain of secondary importance.
As we have already stated, higher interest rates will not solve the problems of surplus supply of money and high inflation, but raising them is a right decision that could have been taken even earlier. Now the government is to make the next step: inflation can be tamed only if the government ceases to increase expenses regardless of the high oil prices and upcoming elections.
By Vladimir Kreindel,
IFS senior analyst
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