Following official confirmation that the annualised rate of inflation in Russia is now 2.7% – far below the Central Bank’s 4% target – the Central Bank has bowed to the inevitable and has cut its key interest rate by 25 base points to 8.25%.
Though any interest rate cut in this situation is welcome, it is important to say that the latest cut merely reduces Russia’s real interest rates from 5.7% to a still crushing 5.55%. These real interest rates are actually higher than the real interest rates Russia experienced during the inflation spike of 2015.
The Central Bank has justified its decision to cut its key rate by only 25 base points with claims that Russia’s current annualised inflation rate is artificially low, and that “inflation expectations remain elevated”.
Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.
Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.
Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.
Note that in this statement the Central Bank finally admits what has now become undeniable: that inflation in Russia this year will be 3% rather than 4%.
The Central Bank is no doubt right to say that some of the inflation fall this year is down to temporary factors such as the larger than expected harvest, though it is worth pointing out that there is no reason at the moment to suppose that next year’s harvest will be smaller than this year’s harvest was.
However the single biggest omission in the Central Bank’s statement is that it fails to identify what is beyond question the single biggest reason for the greater than expected fall in inflation, which is its own interest rate policy.
There continues to be a remarkable degree of denial about this, with many people still denying that a fall in Russia’s inflation rate is taking place even as the evidence for it piles up all around them, and with many of the same people also continuing to deny that the sky-high real interest rates the Central Bank is insisting on imposing on the economy are the single biggest factor in lowering the economy’s growth rate.
As to that a recent industrial managers’ survey published by Interfax (whose site is currently down because of a hacking attack) shows that the single most important factor cited by industrial managers as holding back growth is a lack of demand.
That of course is directly related to the sky-high real interest rates, as anyone with even a basic knowledge of economics understands.