Central bank fails to keep up with inflation rates
The Bank of Russia is forced to tame prices in a difficult economic situation.
First, in 2010 the inflation rate appeared higher than forecasted by the government because of the rise in consumer and service prices. Forecasts for this year have not been revised yet (6 to 7% per annum) but in the first month of 2011 prices grew 2.4% (see the table).
Inflation rates in Russia
|
2010 |
January 2011 |
|
January 2010 |
|
|
|
|
vs December 2010 |
vs January 2010 |
vs December 2009 |
vs January 2009 |
|
All goods and services |
|
8.8%
|
2.4%
|
9.6%
|
1.6%
|
8.0%
|
All goods |
|
9.0%
|
1.8%
|
10.1%
|
0.8%
|
7.6%
|
Foods |
|
12.9%
|
2.6%
|
14.2%
|
1.4%
|
6.1%
|
Non-foods |
|
5.0%
|
0.9%
|
5.7%
|
0.2%
|
9.1%
|
Services |
|
8.0%
|
4.1%
|
8.2%
|
3.9%
|
9.1%
|
Source: Federal State Statistics Service
The government attempts to curb the food prices using the exchange and direct distribution mechanisms, the former method being ineffective because of the commodity market situation and the latter -- because of the corruption.
Yet another problem is inflation risks associated with the budget deficit (around 4% of GDP) that is expected to be covered in 2011 mainly by means of the internal debt. Although oil prices have reached the balanced budget level recently (the current Urals price stands at around 103 USD), the external circumstances lead to official reserve accumulation, which causes inflation.
With high rates of the monetary base growth (around 27% in 2010) and a continuous external lag in the monetary policy, the price growth is unlikely to be slowed down this year.
Russia's central bank increased reserve requirements in February, but it does not exclude the possibility that interest rates can be changed in order to stop the price rise. In our opinion, the revision of reserve requirements would be inefficient as the amount of money due to banks from the central bank for the beginning of February (761 billion rubles) exceeds the amount needed to meet new reserve requirements that have been raised just 0.5 to 1.0%. This reserve ‘throwing' from the ‘surplus' to ‘required' categories will not cause the money supply to drop drastically. Changes in the money base occur gradually within a period of time that depends on the banking system liquidity. A decrease in the surplus reserves, however, will reduce the amount of liquidity available for lending in the interbank market and push up the interbank offering rate (that currently stands at around 3%). If the central bank raises the rate for its liquidity channels, the interbank rate will rise even higher. We believe that a step like this will not be very efficient because, on the one hand, average interest rate for business loans (13%) and consumer loans (19%) considerably exceeds the refinancing rate (7.75%); and on the other, a possible slowdown of inflation caused by changes in the lending terms will hardly overweigh the impact on the price level caused by an increase in the money supply.
In our opinion, ‘flexible' abandoning of foreign exchange interventions and insufficiently strict approach towards inflation management do not allow the central bank to tame the prices efficiently. Even if the FX market is not affected by oil pressures, price growth predictions for 2011 should be increased to the 2010 actual rates.
By Ivan Nazarov,
IFS analyst
News
-
It’s All Set for a Radical Transition to the CryptoRuble
The article by A.Vavilov "It’s All Set for a Radical Transition to the CryptoRuble"/“Vedomosti” new...
-
Credit-driven Asset Inflation and Intergenerational Wealth Transfers by G. Trofimov
"Credit-driven Asset Inflation and Intergenerational Wealth Transfers" article was published in Journal of Mac...
-
FINANCIAL MARKETS’ DIFFICULT PUZZLES
The article by G.Yu. Trofimov, IFI Chief Economist, Financial Markets’ Difficult Puzzles, devoted to the Noble Prize Win...
-
A. Vavilov became a member of the New Economic School Board of Directors.
In May 2013 Andrey Vavilov became a member of the New Economic School Board of Directors.
-
Europe-Asia Studies reviewed Andrey Vavilov's "The Russian Public Debt and Financial Meltdowns"
Europe-Asia Studies reviewed Andrey Vavilov's "The Russian Public Debt and Financial Meltdowns" in Vol. 65...
Analytics
-
Competitive storage and commodity price in continuous time
Commodity Markets \ pdf, 602.5 Кб
-
SOLLERS and FIAT versus GAZ GROUP, DUCATO versus GAZEL
Industrial \ pdf, 284.23 Кб
-
AVTOVAZ stakes on LADA priora
Industrial \ pdf, 270.01 Кб