Nice analysis. Here are some excerpts.
The policy of the Russian Central Bank of maintaining the punitively high key lending rate is truly mind-boggling. First, they declared that they do it for the sake of inflation targeting but then there were indications they do it to uphold the ruble exchange rate.
The policy is no good for either of the purposes. If it were any good, they would for sure let the rate vary with the changed market conditions. This has not happened, the rate has been the same 11% since August 2015 although the currency value has since dropped by 20% and inflation has gone down by more than 6% from the levels of 15.5% to the present 9.5%. Keeping the rate stubbornly at 11% is no policy but a panic reaction showing the Central Bank is as stiffened with fright as its rates.…
In what seems as an endless list of wrong assumptions that the Central Bank is making, one is the very nature of inflation. They seem to think – in accordance with the neoliberal theology – that it is all a question of monetary liquidity, while in fact inflation is at least as much a function of the supply side constraints. The less competition and product offers there are on a market relative to the demand, the more expensive the products become. This should be something which any adult person intuitively understands, but if the experts of the Russian Central Bank do not understand it, they could at least look at the US and EU experience. The central banks of those countries have run for a decade now extremely lenient interest rate policies and have been flooding the markets with liquidity, and yet the inflation there remain at historical low levels at a few percentages. This is because they have an oversupply of production (and cheap imports to compete with)….
Presently the Russian economy is in a very dire situation being buffeted from three sides: sanctions, oil price, and the Russian Central Bank. We cannot hope that the two first mentioned will do anything to alleviate the situation, but the CB must try. One thing is for sure, the punitively high interest rates will do nothing for the ruble value, which is determined by the two first ones, and by speculation.Naturally, Elvira Nabiullina was named Euromoney Central Bank Governor of the Year 2015.
2 comments:
Looks like a textbook 'strong currency' argument.
ISTM that the main reason for ZIRP is so that the arguments about people holding currency for 'interest' are totally defeated and we can get onto the real reasons.
the punitively high interest rates will do nothing for the ruble value, which is determined by the two first ones, and by speculation
There are many factors affecting the exchange rate and it seems incorrect to simply rule out interest rates as being one of them.
Hellevig's article, however, raises another interesting point not covered in the excerpt published here. He writes that Russia's economy is already very diversified. It's the export sector that is concentrated in a few products, but the export sector is not the whole economy.
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