By Rhod Mackenzie
The statements of the representatives of the Central Bank and the statements of the leaders of the mega-regulator, made recently, indicate that with a high degree of probability the key rate will be increased from the current 7.5%. If this actually happens - it is possible that on Friday, July 21, at a meeting of the Bank of Russia - then this will contradict the development plans voiced by the president.
Back in May, when the discussion of the Central Bank’s monetary policy for the period from 2024 to 2026 began, Kirill Tremasov, director of the monetary policy department, said that the regulator did not plan to abandon the inflation targeting strategy.
“Choosing this strategy a few years ago, we took into account excessive inflationary expectations in business and society, and the fact that the Constitution assigned the Central Bank the obligation to ensure the stability of the national currency. And this is, first of all, price stability,” he said.
At the same time, a few years ago - and more specifically in 2015, when the Central Bank announced the targeting strategy - the inflation target was also set at 4%, although there has not been a clear explanation why exactly 4% for all these years.
However, based on this logic of the Central Bank, the prerequisites for raising the key rate can be seen.
The purpose of the Central Bank is clear, but not obvious
As arguments in favor of raising the key rate, the Bank of Russia refers to the recent acceleration in price growth. Despite the fact that the annual inflation rate (the month of the current year compared to the same month of the previous year) is below 4%, and in May-June it even reached a historical minimum, the Central Bank notes the following dynamics: if in May 2023 everything went up in price in by an average of 0.39%, then in June - already by 0.5%. A simple calculation shows that at this rate, the annual inflation rate for 2023 will exceed 4%.
“Our economy experienced disinflation for some time, and now inflation is returning to its usual course. And if we make a projection for the future, then we can assume inflation for 2023 in the region of 5%, ”Oleg Solntsev, head of the monetary policy analysis department at the Center for Macroeconomic Analysis and Short-Term Forecasting, told Expert.
According to the economist, there is nothing threatening in this. But, on the other hand, everyone sees what is happening with the ruble exchange rate.
“The rate has not yet been translated into prices, but in the future this may happen, although not necessarily,” suggests Solntsev. — In any case, I do not think that the increase in the key rate can somehow stop the growth of the dollar in the short term. A large speculative movement cannot be stopped by some percentage. Therefore, I see no point in raising the rate. Nevertheless, I expect that the Central Bank will still do this, however, the rate will increase by a purely symbolic amount. Just to give a signal: we are not sleeping, if necessary, we will raise it properly.”
The economist suggests that the Central Bank does not want economic participants to rely too much on borrowing. On the contrary, the regulator warns that when it is necessary to refinance debts, the rates may already be completely different, and that is why it plans to raise the rate.
At the same time, many experts say that the Central Bank makes a mistake, believing that its targeting policy can mitigate, for example, such a problem as the high import dependence of the economy. On the contrary, it only imposes additional restrictions on import substitution. In addition, frequent and rather abrupt changes in the key rate do not contribute to the formation of a stable business environment.
The Central Bank does not seem to know about the plans of the President of the country
Back in May, when the discussion of the monetary policy of the Bank of Russia began, the heads of enterprises in the real sector asked to lower the key rate from 7.5% to at least 6%. Probably, they could not even imagine that two months would not pass before the regulator started talking, on the contrary, about raising it.
“Obviously, an increase in the key rate for the industry will mean an increase in the cost of already expensive loans needed for development. Even just talking about raising it slows down development - everyone freezes in anticipation of the decisions of the Central Bank and does not start projects that should have already been started, ”Ivan Ter-Mateosyants, executive director of the Scientific and Industrial Association of Valve Manufacturers, told Expert.
According to the scientist and industrialist, the purchase of equipment, the development of new equipment, and the construction of new production facilities are slowing down.
“The Central Bank acts as a brake on import substitution, and I don’t understand how this is consistent with what the Russian president says about the goals facing our country,” says Ter-Mateosyants. - On the one hand, we see how the Mishustin government is trying to take steps towards the development of industry. Provides such support as tax incentives, simplification of bureaucratic procedures. It is trying to accelerate the development and alleviate the financial fate of enterprises in the real sector. On the other hand, the Central Bank takes some position of its own, which clearly does not benefit business and the state. Don't the Bank of Russia know about the plans voiced by the President? Of course, the Central Bank, I have no doubt, has motives for doing just that. This, for sure, bankers can understand, but the industry does not understand this.
During the May discussion of the monetary policy at the Central Bank site, Sergey Lisov, Ph.D., an activist of the Union of Entrepreneurs of the Belgorod Region and Delovaya Rossiya, businessman drew attention to the problems of business in the frontline zone:
“In the Belgorod region, insurance for business is practically unavailable - insurers are afraid of losses associated with shelling and terrorist attacks, there are not enough workers, because some left, fearing war, others volunteered for the front. Due to unbearable business conditions in the border regions, the loan rates should not exceed 6%.»
Lisov considered even the rate of 7.5% impossible, and if it were further increased, it would literally become larger than life for enterprises.
Part of the difficulty in understanding the Central Bank's arguments is that they are supported by flawed data. For example, the Central Bank's argument in favor of raising the rate is to increase the consumer activity of citizens. Indeed, retail trade turnover, according to Rosstat, grew by 9.3% in May compared to May last year. But compared to two years ago, retail trade turnover, on the contrary, decreased by 1.3%.
At the same time, the Central Bank in its materials regularly claims that the acceleration of inflation is associated with insufficient supply. But the Central Bank itself slows down the growth of supply, hindering the introduction of technologies that increase labor productivity with a high key rate. In this sense, the fight against inflation by raising rates is counterproductive: a "spiral" of tightening interest rate policy and curbing economic growth is emerging. At the starting point of the “spiral”, the high level of the Central Bank’s key rate leads to unavailability of loans, which means it limits the accumulation of fixed capital. The restriction on fixed capital reduces the estimates of potential GDP growth, which the Central Bank relies on when adopting interest rate policy strategies. Which, in turn, leads to tougher decisions of the Central Bank on the rate. From this point on, everything repeats itself anew, driving the economy into a tailspin.
Imperfect tool
All the world's central banks use the key rate as a regulatory instrument, however, according to Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences, the importance of such adjustment should not be overestimated.
“At the end of February 2022, the Central Bank managed to maintain the financial and monetary system of the country due to the fact that the key rate was immediately raised to 20% per annum. Despite the negative consequences of such a decision, the main task was completed,” recalls Nikolaev. — This tool has been tested and proven to work well in a stressful situation. But when the economic situation is normal, the advantages of raising the key rate are not so obvious. One should not overestimate this tool and expect that its use will help to cope with inflation.”
Inflation is determined by the action of many factors, and the policy of the Central Bank is only one of them, although an important one. Therefore, it is necessary to take into account the general state of the economy, the exchange rate of the national currency, the level of development of competition in the markets, the economist says.
According to Igor Nikolaev, the Central Bank may raise the rate on Friday, but by an insignificant amount, which will symbolize that the Central Bank, as they say, "keeps its finger on the pulse." According to the analyst, Rosstat conducts a monthly survey of more than 4.5 thousand business leaders. In the question of what factors have the most negative effect on entrepreneurial activity, the rate on commercial loans takes not the first, but 4-5th place.
“Therefore, to say that the growth of the key rate will destroy the industry is an exaggeration,” Nikolaev believes.
However, as a polemic with an economist, we note: if the industrialists did not care about this issue at all, then there would be no point in exaggerating it.
This article originally appeared in Russian at expert.ru