Central Bank continues fighting inflation. What’s next?

Chairwoman of the Russian Central Bank Elvira Nabiullina gave the audience to understand at a meeting in the State Duma that the key would keep growing. A tighter monetary policy is needed for galloping inflation, which seemingly is getting out of control. Since the beginning of the year, the rate has already gradually grown by 3,25% rising from a record low of 4,25% in March to 7,5% in October. Moreover, the latest rise was above the market’s expectations. We saw the ruble get stronger, the stock market grow as a reaction to this decision. Earlier, a significant rise in the rate was in July when it went 1% up to 6,5%. The summer and autumn became a moment when the monetary policy was seriously tightened. As Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin thinks, from a purely economic perspective, it is the correct vector, the CBR should think about macroeconomic stability, not increase banks’ credit portfolios. Because real inflation, despite the official statistics, has two digits.

What CBR says

The regulator notes that decisions on the monetary policy influence the economy and inflation 3-6 quarters late. In fact, the changes that occurred in March are expected to bear fruit soon. According to Nabiullina, the government must take inflation back to its objective not to lose people’s trust. This indirectly proves that not everything is under control, there are problems. According to the Russian Federal Statistics Service, in early November, annual inflation was 8,07% reducing from 8,14% in October. Some experts assume that it was the peak, and the situation will stabilise. The next two months will show it.

Judge for yourself, when the CBR raised the rate by 1% in July (the biggest rise over the year), outlooks for annual inflation changed from 4,7-5,2% to 5,7-6,2%. We are already above this outlook in November, moreover, we are two points ahead. Also in July, the CBR thought that a comeback to 4-4,5% was possible only in 2022. This is simply impossible, inflation even in the US is over 5% a year. We enjoy the heavy rain of money thrown into markets to stimulate the economy amid the pandemic. A fight against recession is the root cause of galloping inflation around the world. This is not only our problem.

Prices in Russia grow constantly, all markets — from food to construction — are affected. The CBR has to balance between the necessity of keeping prices from growing and not going too far by destroying the origin of economic growth. These processes have different vectors and require fine tuning. This balance hasn’t yet been found.

Growth of inflation in the world and Russia

The USA is the source of global inflation, it already has had the highest inflation since 1990. The status of issuer of the world’s key currency obliges it to take decisive actions to stimulate the economy, which was done, and trillions of dollars were issued. As a consequence, prices for everything soared — feedstock, food and so on. The expected correction in commodity markets didn’t happen — the growth of prices for them partly cancels the tighter monetary policy around the world.

In Russia, the anomalous growth of inflation began in late 2020 when the ruble devaluated, which added fuel to the fire. The impact of this factor is assessed at 1,5%. In other words, if not the ruble rate’s fall, we could have kept inflation at 4% (as the CBR planned). Earlier this year, prices grew at such a pace that the state had to take state control measures, which led to a more rapid growth.

A lot of experts doubt that only a monetary policy can cope with inflation. According to the tone of the CRB’s statements this year, the growth of prices is primarily conditioned by stable factors — when demand outstrips supply. Earlier this year, the CBR considered that the increase in world prices for goods propelled inflation, it was supposed to be a temporary occurrence.

There is an interesting moment here: a currency is needed for imports, while we see an interesting incoherence in the range of rates. In November 2020, oil fell below $40 per barrel, the ruble decreased to 80 rubles per dollar. Today oil is sold for over 75% per barrel, whereas the ruble stays at 75 rubles per dollar. It feels like the CBR purposefully keeps the ruble cheap — to help exporters and the budget (to raise incomes and lower obligations). The CBR has to buy currencies within the current budget rule in today’s situation. Our international reserves grow, so does inflation. With a lower dollar rate, as consumers we wouldn’t pay so much for imports.

The CBR thinks that prices are growing this autumn due to one-time factors, especially in agriculture. The main danger of the growth in this sector is that the higher price for basic goods for the population (milk, meat, vegetables) can raise inflation expectations. Also, due to a shortage of components and feedstock, logistic problems and troubles in the labour market, supply cannot meet the growing demand. In a situation with restricted supply, this brings to a rise in prices for goods.

Regulator hastened to make forecasts

In conclusion, I would like to note that the population’s inflation expectations in October, according to the CBR’s poll, are high, 13,6%. In July, the CBR noted an improvement in the situation with food inflation and weaker inflation pressure in general in June and July. The tone of the CBR’s comments then spoke about a limited growth potential of the rate. The autumn decisions and further scheduled hardening of the monetary policy say that the CBR hastened to make favourable forecasts.

In general, given the current price rise dynamics, one shouldn’t wait for a significant slowdown in inflation till the end of the year. The price growth is too far from the CBR’s targets. A rise in the key rate to 8,5% by the end of the year will not be a surprise. Growing attractiveness of Russian assets, which will lead to an influx of foreign capital into our financial markets, thus supporting the ruble, will be the edge of the rise. It is not ruled out that the ruble will increase to 69 rubles per dollar and 81 rubles rubles per euro.

Artur Safiulin

The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.