Central Bank of Russia Cuts Interest Rate to 15% from 17%

January 30, 2015

Russian consumer price inflation has catapulted higher, fed by the massive plunge of the ruble in the second half of last year.  In December alone, prices jumped 2.6%, raising the on-year advance above 11%.  From 5.5% a year ago, the Central Bank of Russia’s one-week auction rate was lifted by 150 basis points last March, 50 bps each in April and July, 150 bps in November, 100 bps on December 11, and 650 basis points more to 17% on December 15.  That effort to defend the ruble and counter rapidly rising inflation expectations was trimmed back in part today.  A statement of explanation released by the Board of Directors asserts that the acceleration of inflation will be self-limiting and peak next quarter, and it also makes the case for reordering priorities with greater emphasis than before being placed on the promotion of demand.  The restoration of single-digit inflation by this time next year is predicted.

The decision to dramatically raise the key rate taken by the Bank of Russia on 15 December 2014 resulted in stabilization of inflation and depreciation expectations to the extent the Bank of Russia expected…. Current monetary conditions set the ground for inflation decline in the medium run. Annual money supply (M2) growth rate decreased considerably… Annual GDP growth will amount to (-3.2%) in the first half of 2015. The decision taken is aimed at averting the sizeable decline in economic activity against the background of negative external factors…. Inflation and inflation expectations are forecasted to decrease as the economy gradually adjusts to changing external conditions and the impact of the exchange rate dynamics on prices exhausts. Slowdown in consumer price growth will be facilitated by subdued aggregate demand with total goods and services output remaining below the potential as well as by slightly tight fiscal policy.

The Central Bank of Russia’s policy reversal even as inflation still shows considerable upward momentum constitutes a big gamble.  The cause of the ruble’s slide – Putin’s reckless foreign policy and the Fed’s determination to begin raising interest rates within a couple of months – remains intact.  Expectations of higher inflation will now get a boost from the central bank’s quick reversal of December’s tightening.  Once expected inflation becomes untethered, actual inflation becomes less sensitive to changes in the output gap, and it may not matter that real GDP is contracting at a pace of about 3% during the first half of 2015.

The next scheduled policy meeting is March 13.

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



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