The Central Bank of the Russian Federation Reduces Key Interest Rate to 14.0%

March 13, 2015

Following up on a 200-basis point rate cut at the start of February, Russian monetary officials cut the key central bank interest rate by a further 100 basis points.  In response to last years ruble crisis that lifted inflation into double digits, the rate was raised four time between March and November by a total of 400 basis points and by an additional 750 basis points in two moves during this past December.  Under heavy public pressure from the Kremlin and Russian industry, 300 basis points of that tightening has been reversed quickly.  Moreover, the new 14.0% interest rate is significantly below inflation of 16.7%, and policy is being relaxed faster than inflation is receding.  Although on-year inflation softened by a tenth of a percentage point in February, officials expect it to crest next quarter.

A released statement defends today’s policy action and reaffirms the intention to continue cutting the key interest rate by projecting that CPI inflation will fall to 9% by March 2016 and to 4% in 2017.  The spike above 15% is attributed to temporary supply-side issues that will be fading, while on the demand side, a projected 3.5-4% contraction of real GDP in 2015 will be depressing inflation sharply.  The central bank’s logic flies in the face of the experience of past high inflations, including in the United States, where the CPI see-sawed higher and higher and peaked at nearly 15% only after a monetarist policy by the Federal Reserve allowed short-term interest rates to catapult well over the rate of on-year inflation.  The central bank’s gamble only has a chance of succeeding if the ruble stops depreciating, which is unlikely with President Putin’s xenophobic foreign policies that are provoking foreign sanctions.  Plunging oil prices for this energy producer also hurt the ruble.

The next Russian monetary policy meeting is scheduled for April 30.

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

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