The Russian Central Bank has, as predicted, cut its key rate from 10.5% to 10%.
This is consistent with the continuing rapid fall in inflation. With inflation zero in the first two weeks of September after being zero in the last week of July and through most of August, its annualised rate is now just 6.6%. The Central Bank has said that it intends to keep its key rate 3% above the annualised rate of inflation for the foreseeable future, so that with annualised inflation running at 6.7% it had the space to announce this rate cut.
However that is where the good news stops. The Central Bank has signalled that it intends no more cuts to its key rate this year, meaning that the earliest possible date for a further rate cut will not be before January next year. The Central Bank also says that it will maintain what it calls its “moderately tight monetary policy” – a policy which is in fact giving Russia the highest real interest rates of any major economy in the world – throughout 2017 and indeed beyond.…
This would be especially so given that the moderate loosening of monetary policy this would call for would be most unlikely to compromise the anti-inflation policy in any serious way. At worst it might delay achievement of the 4% by a few months, or perhaps a year.
Russia however is different. With unemployment very low at 5.7% at a time when the country’s labour force participation rate is at an unprecedentedly high 70%, and with political and macroeconomic conditions stable, the Central Bank and the government obviously feel they have the political and economic space to see the policy through, and it seems they are determined to see it through come what may. Not for nothing is Nabiullina being called “the most orthodox Central Banker in Europe”.Russia pursuing "expansionary fiscal austerity"?
As for Putin, as I said in my previous article I have no doubt he supports the policy. With the political situation in Russia stable and his popularity at stratospheric levels, he is moreover under no real pressure to change it. If only for that reason I don’t expect the policy to change.