What however is holding the Central Bank back is - in her own words - the following:
"What worries us quite seriously is that medium-term inflationary expectations, in particular those of the professional community, not only economic agents, but professionals, not anchored at a level even close to 4% to this target, which we have. And us there is a very serious task is to make it so that all believe that we a) want to reach it and b) will carry out such a policy, which will allow for reaching it”.In plain language, what principally worries the Central Bank is not inflation, the rouble’s exchange rate, the savings rate, or the general state of the economy, but the Central Bank’s credibility - or lack of it - with the financial community (ie. bankers, financial analysts and traders) who doubt it is serious about its 4% inflation target.
In other words the Central Bank is keeping the interest rates high - and the economy in recession - so that it can gain the confidence of these people.
The reason there is now a crisis of confidence in Western Central Banks’ ability to manage the Western economy is because for far too long Western Central Banks did whatever the West’s financial community wanted.
The Russian Central Bank should learn this lesson and should not fall into the trap of doing the same thing.
If general economic conditions point to the need for a reduction in interest rates - which in Russia they do - then the Russian Central Bank should have the courage of its convictions and just do it, and not worry too much about what the financial community thinks.The Confidence Fairy is alive and well in Russia. So is neoliberalism.
That is the way to gain credibility, and to show to the financial community who is the master.
Russia Insider Daily Headlines