CENTRAL BANK REDUCES THE RATE, SACRIFICING INFLATION
The Bank of Russia reduced its refinancing rate by 25 percentage points, to 8%. This year, the Central Bank has already increased the rate twice – in February and in May.
Source: Bank of Russia
It is noteworthy that the Central Bank explains rate reduction and increase in virtually the same words. Let’s quote: "Such resolution (rate increase in May 2011. - Author) was made by the Central Bank due to preservation of high inflationary expectations, which exceed the inflation forecasts for 2011, and also to offset the unambiguous impact the unstable situation on global financial and commodity markets produced on the Russian economy". December 2011: "This resolution (rate decrease. - Author) was made taking into account the assessment of inflationary risks and the risks for the economic growth stability, in particular, those resulting from the persisting uncertainty of the foreign economic developments”.
The consumer price increase on the X-mas and New Year eve (December, January) is traditionally much higher than in other months. It is due, first and foremost, to growing demand for commodities and increase in natural monopolies’ tariffs (except for the future 2012, when the tariff increase was postponed for summer, at the Prime Minister’s order). This is a temporary phenomenon, and there is no sense in struggling with it.
Theoretically, the refinancing rate increase contributes to the inflation decrease. The rate reduction makes money cheaper and, consequently, leads to reduction in the savings rate and lending growth (including consumer lending), which directly influences the demand of households. Thus, theory links inflation and the refinancing rate inversely. Quite probably, the Central Bank, having estimated the current inflation level, regarded it as permissible for small rate reduction. In this way, the Bank of Russia plans to improve the cash accessibility for a certain period of time. And then the rate may be increased.
G.V. Kovalishina,
Head, Corporate Finance Department
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