MONETARY AUTHORITIES IN SEARCH OF CAUTIOUS COMPROMISES
In January, the Bank of Russia’s Board of Directors left unaltered the refinancing rate, at 8.25%, after its previous increase by 0.25% in September 2012, due to increase in food prices. Thus, the Central Bank has once again shown its commitment to the conservative policy that has prevailed through the last two years, due to the inflation surge since late 2010, which has not been eliminated so far. The previous year’s inflation rate, 6.6%, cannot be regarded as an achievement as compared with the record low 6.1% of the year before last.
With aggravation of external inflation risks, the monetary authorities are forced to be cautious, due to aggravation of external inflation risks. Another quantitative relaxation implemented by U.S. and European monetary authorities entails an additional threat of inflation import via two channels: through prices for energy, food and raw materials and through inflows of speculative capital. The impact of the latter on actions of the Russian monetary authorities may prove to be less significant, thanks to consistent implementation of a flexible rate policy to be transformed (within three years) into the floating rate mode.
Besides, the Bank of Russia’s top management has valid reasons to apprehend internal, non-monetary inflation factors. Poor yield for grains and other crops in Russia (up to 40% of price increase for fodder crops) made the most significant adverse contribution last year. 10%-15% revision of regulated rates was postponed last year for political reasons but will, obviously, affect the consumer price growth in the current year.
The continued moderate conservatism of the monetary policy is also determined by the strategic choice of priorities and targets. The monetary authorities firmly stated they would slash inflation to 4%-5% in 2014/2015 and convert to the inflation targeting system in the future. It is the primary objective for the Russian Central Bank’s top management, which justifies the adaptive actions depending on the actual inflation rates, at least, in the absence of external shocks. This year, the Bank of Russia needs to achieve the annual inflation of at least not higher than 6%, which was stated as a goal one year ago already. The resolutions as to the base rate revision will depend, first of all, on the inflation rates in 1Q. The monetary policy may not be relaxed before 2Q, and this relaxation is only conditional upon marked improvement of the inflation data as compared with last year’s monthly figures.
Policy may also be relaxed because of further slowdown in money supply growth rates. M2 aggregate growth slowdown from the sustainable annual level of approx. 30% to a quite acceptable value of 21% in 2011 suddenly turned into the crash of this rate to 12% last year. The money aggregate plunge is attributed, first of all, to the credit multiplier reduction. Presumably, this hazardous trend is unlikely to continue, but, in case of urgency, the Bank of Russia will be forced to take drastic efforts to refinance the banking system and to reduce volatility of the money market rates. Considerable extension of the list of admitted pledge instruments was the signal of readiness for flexible liquidity management.
To some extent, the policy indefiniteness factor is now the forthcoming change in the Central Bank’s CEO. Possible nominees represent different approaches to implementation of the adopted strategy, but hardly any drastic changes in policy. Irrespective of personnel changes, the Russian monetary authorities will be forced to look for compromises, remaining cautious. Loss of control over inflation, which it tried to tackle, slowly and painfully, through the last few years, will become a much more bitter defeat than short-term reduction in GDP rates, which may be blamed to many circumstances. Generally speaking, the Bank of Russia is responsible for investment slump due to real lending stagnation.
Chief Economist
G.Yu. Trofimov
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