Russian Monetary Easing Paused Because of Ruble Collapse

September 11, 2015

750 basis points of tightening in December 2014 had lifted the Bank of Russia’s repo rate to 17% coming into 2015 and 11.5 percentage points above the mid-2014 level.  A shift in monetary gears as the Russian economy spiraled into deep recession say the repo rate reduced five times in the first seven months of 2015.  The last of these moves cut the rate to 11.0% from 11.5%. 

Russia’s economy is now in desperate shape.  The repo rate level is well below CPI inflation, which climbed to 15.8% in August, propelled by runaway ruble depreciation.  Real GDP, however, fell 4.6% in the year between 2Q14 and 2Q15.  Officials would like to cut the repo rate further but cannot because that would expose the ruble to even more selling pressure and the economy to more inflation.  Today’s statement explaining the decision not to change the repo rate calls the policy stance “moderately tough,” assumes a leveling off of oil prices around $50 per barrel, and optimistically envisages inflation settling back to “about 7% in September 2016 and the 4% target in 2017.”  But officials also realistically presume that the rising trend in expected inflation can only be stopped after actual inflation starts falling and that such is not going to happen while a vicious cycle of ruble depreciation and rising actual inflation continues.  Hence, they are blocked for now from cutting the repo rate further.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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