The Bank of Russia is sure that controls inflation
In the third quarter of 2018 in the field of monetary policy the Bank of Russia was a truly historic event. At the meeting on 14 September 2018 the interest rate of the Central Bank of the Russian Federation was increased by 0.25 PP to 7.5%. The decision was unexpected for the market, especially on the background of the preceding meeting of the Board of Directors of the Central Bank of statements that Russia is now a few factors in favor of further reduction of the key rate, but much more factors in favor of maintaining rates at a constant level. The main reason for the increase in the key rate of the Central Bank of the Russian Federation has been an acceleration of the rate of annual consumer price inflation in August, although the pace of monthly inflation in August was zero, compared with July.
Annual inflation in August, however, accelerated to 3.1%, which, as subsequently noted in the comments of the Bank of Russia meeting on 14 September, contributed to the approximation of this indicator to the target level of the Central Bank at 4% per year more rapidly than before. Thus, the Board of Directors of the Central Bank decided to raise the key rate, which marked a major change of orientation of monetary policy in Russia.
In fact, the Bank of Russia has chosen a priority the fight against inflation instead of supporting economic growth through more affordable loans. The shift to tightening monetary policy with a certain time lag contains risks for the real economy, as it can slow down economic growth. But the change of priorities of monetary policy in Russia has become urgent amid rising gasoline prices in the second quarter (third-quarter growth in fuel prices slowed, however, it is possible that for a while), as well as the collapse of the ruble in August on the back of news about new US sanctions against Russia.
In addition, the inconsistent statements of the Central Bank and Finance Ministry on whether Central Bank on behalf of the Ministry of Finance continue to buy foreign currency on the stock exchange, frightened foreign exchange market is much stronger than expected by the Finance Department, in the end from the beginning, the Russian ruble has lost more than 20% of the cost. Added to the negativity and emerging markets, in particular, the collapse of currencies of Turkey, Argentina, South Africa, India and some other developing countries, and a managed devaluation of the yuan in China. But by the end of the third quarter panic in emerging markets has stopped, which has had a positive impact on the ruble.
We believe that at the meeting of 26 October, the Bank of Russia can keep the key rate unchanged, unless there is any significant external negativity. Recall that in 2016 the decline in interest rates led to higher growth in the real sector of the economy, although it is not to say that in the short run relationship between interest rate and GDP growth are highly expressed. In the fourth quarter, the Board of Directors will hold another meeting in December.
Most likely, the new increase in the key rate will be possible due to the influence of external negative, such as the fall in oil prices below $70 per barrel or acceptance in the U.S. Congress anti-Russian law CAATSA, which extends U.S. sanctions on the Russian public debt and limit state-owned banks of Russia dollar operations. But the likelihood of passing such a law, we believe small.
The Deputy Director of analytical Department,