Amongst Russia’s three big economic policy making institutions - the Economics Ministry, the Finance Ministry and the Central Bank - the Central Bank has been consistently the most pessimistic - and the most wrong - in its economic forecasts (the most optimistic and the most right has been the Economics Ministry).
That suggests the Central Bank is working with an outdated model of the economy that makes mechanical predictions about inflation based on levels of the rouble and the oil price, which would explain why it is getting the inflation rate wrong.
Even allowing for this the Central Bank’s refusal to believe the good news is odd.
Explanations I have heard for the Central Bank’s insistence on keeping interest rates high despite inflation falling faster than it expected is that it is not really worried about inflation at all but is keeping interest rates high in order to support the rouble and to encourage higher saving.
These are worthy aims. However the major difficulty in attributing to them the present interest rate policy is that they are not the aims the Central Bank is giving to justify it.
Central Bank officials have occasionally spoken about the need to encourage higher saving in the economy. However they do not cite this as their reason for keeping interest rates presently so high.
As for supporting the rouble, they tend to deny that this is a factor in their decisions at all.
Instead they focus exclusively on inflation, as the Central Bank did in its recent Statement, and as Central Bank Chairman Nabiullina did in her recently published comments explaining the decision.
I would add in passing that there is in fact little evidence that the current high interest rates are providing much support to the rouble, whose rate continues to track even the tiniest movements in the oil price.
As for the saving rate, it is indeed a worthy aim to seek to increase it. However my opinion is that the reason it has been less high than it might otherwise have been is Russia’s historically high inflation rate which has deterred saving, in which case it will rise as inflation comes down.
My view remains that the true reason the Central Bank remains reluctant to reduce interest rates is the one given a short time ago by Central Bank Deputy Chairman Yudaeva - that the Central Bank is worried that the financial community - ie. market traders and analysts - does not believe it is serious about achieving its 4% inflation target. Central Bank Chairman Nabiullina is now reported to have said the same thing.
As to that I will say what I said before: it is understandable that the Central Bank after the humiliation it suffered when it briefly lost control of the rouble in December 2014 should want to regain the credibility it fears it lost with the financial community. With both output and employment steady it may also feel under no real pressure to do otherwise
The problem is that the people who work in the financial community have almost to a man and woman an institutional bias in favour of the bleakest possible view of the Russian economy. Trying to appease them is hopeless and should not be a reason for deferring an interest rate cut if that is what economic conditions point to.…Russia Insider
How Russia's Economy Is Being Strangled by Its Central Bankers
Alexander Mercouris
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