Key question here... story at Bloomberg via Yahoo here. Could be potential bad news on the horizon.
While there are plenty of obstacles to lowering rates with inflation at a 3 1/2-year high and the ruble set for the biggest drop since 1998, derivatives used to predict future borrowing costs signal cuts are in store in the first quarter.
Central bank Governor Elvira Nabiullina unexpectedly raised the benchmark to 17 percent from 10.5 percent two weeks ago, putting the economy at risk of a deeper recession to prop up the ruble.I hope they don't cut rates so soon.
We need them to keep the rates up for a meaningful period to see if the true effects of an interest rate raise are actually stimulative as the govt is a net payer of interest and as such, high rates are fiscally supportive.
If this hypothesis is true we should see a fairly rapid domestic Russian recovery if they keep rates up at 17% for rouble savers long enough.
10 comments:
I think we have to consider how much of gdp is driven by private investment. And then consider net-debt position of the private and external sector relative to government.
In the United States regular people on the street own alot of US government debt (through banks, insurance companies, pensions, 401ks and what not) while much private debt is fixed rate. And consumption is far more important than investment in gdp.
I'm not sure if Russian people domestically, with the relatively short time that the Russian government has existed and their massive private investment boom following the end of the Soviet union, own more government debt than they owe in variable rate debt to the government and external sector. They may also have a large amount of employment dependent on investment. There is some nuance to the higher rates adding income argument, maybe?
Yes Ryan but we've linked to reports here where they have the corporate borrowing rates much lower than the 17%...
Yes it is nuanced... I am not "all in" on this ... I'd like an opportunity to test this hypothesis here is all...
Iirc their total public debt is $235B before the big devaluation. . So they should have to start paying 17% on this as it rolls over...
So somebody over there is going to start to receive $40b+ rouble equivalent annual on that if they keep it at 17% for a while...
I hope we get to see how this works out is all... but to do that they are giing to have to stay at 17% for a while imo...
Rsp
The other thing Ryan is even if gdp there is driven by private investment, where does the initial increase in income come from for banks to be able to point to to increase domestic bank credit there?
It has to come from a leading increase in fiscal.
So in this case, we have fiscal in the form of interest income....
Once this increase in fiscal flow starts to hit the domestic economy, then people there can "take that to the bank..." etc...
rsp,
The distribution characteristics of monetary policy are not certain.
Adding interest to the economy will do nothing if it is just absorbed into net rouble savings due to a collapse in borrowing.
This is why you don't bother trying to steer the car with monetary policy. There is no guarantee at all that those gaining the roubles will spend them.
We need them to keep the rates up for a meaningful period to see if the true effects of an interest rate raise are actually stimulative as the govt is a net payer of interest and as such, high rates are fiscally supportive.
Didn't Volker demonstrate the contractionary effect of ultra-high rates? As Steve Keen has demonstrated, even a mere deceleration of private debt can trigger a recession.
It seems inevitable that Russia will have a recession, as demand leakages increase due to falling oil prices and rising prices for imported food and manufactured goods. Perhaps a recession could be avoided with aggressive Keynesian spending, but Russia's rulers seems to be financially conservative and they are afraid of inflation -- the old stagflation conundrum.
Dan, they are looking to stabilize the ruble and currency markets don't like the government fiscal balance going negative. So Russia is caught between a rock and hard place in this respect. They also don't want to use rationing, wage and price controls or capital controls either, since they think it will spook investors. So what they are left with is special lending facilities and helicopter drops run by the RCB.
Tom Unless they are ignorant of the interest income channel... which I think they just might be... this ends up increasing fiscal...
Dan neither Volker nor Keen have any insight into any of this imo... Keen might have proved a tautology where "a slowdown in lending causes a recession in the lending industry. .."
?????????? So what....
Here: "a drop in the consumption of ice cream can cause a recession in the ice cream industry. . " scan my PhD diploma and email it to me....
Matt, it should be easy enough to graph interest income from government bonds and demonstrate the alleged correlation to GDP or whatever????
Interest income is one channel to pump money into the economy, but never the only channel, and probably almost never the largest channel. The beauty of sectoral balances is that it looks at all channels.
Private debt tends to be the most volatile channel -- prone to bubbles and crashes.
Yes Dan its just one channel ... but at 17% it could be pretty substantial.... this is reeeeallly high...
And if they are believing the typical "higher interest rates are bad....period..." then they dont look at this policy as in any way stimulative...
The woman at the CB said they were going to do some infrastructure stuff too so as long as they dont go all austerity on themselves somewhere else this should turn around pretty quickly for their domestic focused entities...
to examine this in further detail you would need access to the "Russian z.1" which I dont know if that is out there and/or in English...
rsp
IN 2013, foreign holding of Russian debt was ~30%.
Rob Minto, Russia: where did all these foreign bond owners come from? at FT
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