I recently expressed my opinion that the Central Bank should be cutting interest rates more aggressively than it is (see “Russia’s Central Bank Should Now Cut Interest Rates Aggressively”, Russia Insider, 12th June 2015).
I am far from alone in that view. Others who know much more about the Russian economy than me — Elliott Auckland, Jon Hellevig, Eric Kraus — are of the same view.
Their number has now been joined by the most powerful voice of all – Aleksey Ulyukaev, Russia’s Economics Minister. He presumably knows the state of the Russian economy better than almost anyone. He too thinks the Central Bank should be cutting interest rates more aggressively than it is.
Moreover he has made his opinion public in a statement reported by TASS. I attach the TASS report below.
The irony is that Ulyukaev was for many years the deputy head of the Central Bank where he was seen as a monetarist hardliner. He was widely expected to be appointed chair of the Central Bank in 2013 when Ignatiev, its previous chair, retired. However, in a surprise move Putin picked Nabiullina to chair the Central Bank and appointed Ulyukaev Economics Minister instead.
In the light of Ulyukaev’s recent comments some people must be wondering whether Putin made the right choice.
Back in December 2014, as the ruble was crashing, it was Ulyukaev who stepped forward to calm the markets after Nabiullina gave a television interview whose fatalistic tone undoubtedly added to the panic.
In fairness to Nabiullina she has been busy over the last few days explaining the Central Bank’s policy.
Some of the things she says make sense. Others rather less so.
She has been busy warning Russian companies against excessive borrowing in international financial markets.
She has also made clear the Central Bank’s intention to tighten credit growth even more, which seems extraordinary given that the economy is suffering from a recession caused in large part by falling demand.
A possible explanation is that the Central Bank is using the recession to bear down on inflation even more.
The Central Bank for several years has made it known that its intention is to squeeze inflation down to a for Russia unprecedented annual level of 4%. It is beginning to look as if the Central Bank is using the recession to achieve that target.
That may sound heartless but it is the sort of thing Central Bankers sometimes have to do. It is what Paul Volcker did when he chaired the U.S. Federal Reserve in the 1980s.
Volcker’s tough interest rate policies (the so-called “Volcker Shock”) undoubtedly deepened the recession the U.S. suffered in the early 1980s. However they are now generally credited with squeezing inflation out of the U.S. economy, curing the US economy’s persistent high inflation problem of the 1970s. One of the reasons for the financial crisis in the U.S. in 2008 was because after Volcker’s resignation in 1987 the U.S. Federal Reserve, instead of protecting financial stability by raising interest rates periodically, threw caution to the winds and intervened continuously to prevent recessions by keeping interest rates excessively low, sacrificing financial stability for economic growth.
The Russian Central Bank’s single-minded focus on inflation is not anti-inflation fetishism.
Russia needs to increase rates of long-term investment in its economy especially in high technology and manufacturing. High inflation works against such investment. It encourages instead short-term thinking because it causes the value of long-term financing and profits to diminish over time. Russia suffers too much from short-term thinking and lowering inflation is essential to cure this problem.
Having said this, it remains my view that the Central Bank is taking this too far and Ulyukaev (hardly a monetarist softie) clearly thinks the same.
The Central Bank’s tough interest rate policy in the midst of a recession is not just bringing inflation down. It is actually causing deflation this summer.
That is too much. A steadier policy that looks forward at the direction inflation is taking, rather than backwards at the direction it took at the start of the year, is what the situation calls for.
The difference between Nabiullina and Ulyukaev is that Nabiullina comes across as more of an academic economist than Ulyukaev.
Central banking requires a grasp of economics, but it requires something more, which Ulyukaev has but which Nabiullina for the moment does not.
What that is was best summed up by the man who was arguably the twentieth century’s most famous — or notorious — central banker: Hjalmar Schacht, the man who headed the Reichsbank for most of the interwar period.
“…..the arithmetical nature of finance seems to inspire the mathematically-minded, and their efforts always tend in the same direction, towards the creation of an automatically functioning solution operating according to fixed mathematical rules. But the currency problem is not a problem which can be solved according to fixed rules. If it were, then perhaps a capable professor of mathematics would be the best financier after all. Monetary policy is not an exact science but an art. As such it is a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself to the man who is.”
(Hjalmar Schacht, Account Settled, George Weidenfeld & Nicholson, London 1948)
On the evidence so far Ulyukaev has mastered this art, while Nabiullina has not yet. Successful central banking needs someone with their finger on the pulse of the country’s commercial life. For the moment Nabiullina doesn’t have it.
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From TASS
Russian minister stands for more aggressive key rate lowering
Economy June 15, 16:20 UTC+3
The Russian Central Bank has lowered the key rate to 11.5% from 12.5%
YALTA, June 15. /TASS/. The decision of the Central Bank to lower the key rate is a moderate step in the right direction but moves should be more aggressive, Russian Minister of Economic Development Alexey Ulyukayev said on Monday.
“This is a step in the right direction but one should be more aggressive. 100 basis points are a very small step, a step in proper direction but very limited, I would say. Steps need to be more aggressive,” the minister said.
Ulyukayev did not identify any limits for optimal lowering of the key rate. “I will not indicate figures but I reiterate, it [key rate lowering] might be more aggressive,” the minister said.
The Board of Directors of the Bank of Russia decided today to lower the key rate to 11.5% from 12.5% as of June 16.
Key rate changes
The Russian Central Bank can raise the key rate to prevent a collapse of the market and to even-out exchange fluctuations. With a low rate, banks can borrow rubles from the Central Bank, buy currency and with the ruble depreciation cover costs of paying interest on the loan. With an higher rate such speculative operations become more risky. At the same time, if the rate grows, the loan cost for businesses and households also increases - there may be difficulties with the refinancing of already issued loans. This may lead to a slowdown in economic growth.
Until 2013, the refinancing rate was the main discount rate. It was first set in 1992 at 20% per annum, in 1993-1996 it reached the level of 210%, then fluctuated between 20%-50%, and after the peak in May 27 - June 4, 1998 (150%) decreased gradually. The minimum refinancing rate level was set on June 1, 2010 and remained in force until February 28, 2011 - 7.75%. The current refinancing rate of 8.25% was set on September 14, 2012, although by the beginning of the 2010’s it was used only as a tool for calculating fines, penalties, and a benchmark for the minimum amount of interest on ruble deposits of the population, and loans to banks were issued using other instruments, especially repo transactions.
