Miscalculation of the Bank of Russia
The Bank of Russia should have started increasing interest rates earlier, stated Elvira Nabiullina, governor of the Central Bank of Russia, in an interview with RBC.
“Inflationary pressures started to increase starting from the second half of the year. And now the rate of price growth is actually quite high, well above our inflation target. “And yes, looking back, we understand that monetary policy was soft and the interest rate should have been raised sooner,” he said.
As the Governor of the Central Bank of Russia emphasized, in order to soften the policy, we must first ensure that inflation falls steadily. Analysis of a wide range of indicators will be required for at least 2-3 months. According to him, the price increase now significantly exceeds the regulator’s target level of 4% included in the budget. On November 22, First Deputy Director of the Central Bank’s monetary policy department, Andrei Gangan, said that the regulator still keeps its 2023 inflation forecast at 7-7.5%.
Up to 16% increase
The Central Bank increased the policy rate from 7.5 percent to 16 percent in five stages in 2023. The first decision to tighten regulations was taken in July.
The Central Bank of Russia increased its lending percentage to 16% annually on December 15. Then the regulator explained the decision as the national economy was overheating and inflation expectations of the population and price expectations of enterprises continued to rise.
The Central Bank described inflation pressure as high. The regulator expects the inflation rate at the end of this year to be close to 7.0-7.5%, the upper end of the forecast range. At the same time, GDP growth in 2023 has exceeded forecasts and stands at 3% so far.
“This means that the upward deviation of the Russian economy from the balanced growth trajectory in the second half of 2023 is more significant than the Central Bank of Russia had predicted in October,” the Central Bank said.
That day, Nabiullina compared the economy to a car. “If we try to drive faster than the car is designed to do and press the accelerator as hard as possible, sooner or later the engine will overheat and we won’t go very far. We’ll probably go fast, but it won’t last long.”
Opinions about the rate
On December 7, Russian President Vladimir Putin called the decision of the Bank of Russia to significantly increase the interest rate correct.
“There are disagreements on the key rate. “The numbers show that, in general, the right direction of development was chosen in decision-making,” he said.
– Putin at the VTB investment forum “Russia is Calling!”
The regulator’s actions were commented on August 15 by billionaire (his fortune is $ 2.5 billion, according to Forbes) Oleg Deripaska, founder of the combined company Rusal and En+ Group. Later the rate was increased to 12 percent. Deripaska said that it is an established tradition to increase the indicator “against the background of general frenzy and meaningless spells that everything will be fine and probably even better.”
“Maybe it’s not so festive [традицией]”It’s like New Year’s Eve but still very sweet, especially for a few state-owned banks,” he said.
Chairman of the State Duma Committee on Financial Markets Anatoly Aksakov suggested that the Central Bank will most likely begin to reduce interest rates in the second quarter of 2024. He said the 16 percent increase was correct as the country needed to reduce inflation. According to him, key interest is the main tool in this regard. However, the MP believes that the 16% position is the limit.
“The pressure on the market will decrease, inflation will begin to fall, and then the Central Bank will begin to gradually reduce interest rates, I think starting from the second quarter, which means loans will become cheaper,” Aksakov said.