As anticipated the Russian Central Bank has cut its key interest rate by 50 base points, bringing it down from 11% to 10.5%.
Whilst this is not in itself a significant reduction, it is a step forward especially as the Central Bank is signalling that it will cut interest rates further over the course of the year.
The interest rate cut has come with a revised inflation forecast. The Central Bank now anticipates inflation for 2016 to be in a range of 5 – 6% and below 5% in April 2017. It still expects inflation to fall to its target of 4% in the second half of 2017.
The Central Bank’s revised forecast for inflation this year is in line with what Jon Hellevig and I have been saying for some time.
By any objective measure interest rates in Russia are still excessively high. With weekly inflation running at 0.1% or below, the true annualised rate of inflation is arguably already at the 5 – 6% level predicted by the Central Bank for the whole year.
Interest rates in Russia are therefore approximately twice the rate of actual inflation. By comparison, they may have been below the level of weekly inflation in the first crisis weeks of January 2015 when interest rates hit their headline peak of 17%.
The economy’s resilience in the face of such high interest rates is remarkable. It probably reflects the comparatively low level of debt in the economy and the competitive boost the economy is getting from the devaluation.
There have been some concerns that the high interest rates are providing excessive support for the rouble, which could over time lead to the rouble’s appreciation, thereby negating the positive effect on the economy of the devaluation.
This is a real danger going forward. However for the moment the rouble still seems more affected by movements in oil prices than by the level of Russian interest rates. However importantly, and despite the recent recovery in oil prices and the high interest rates, the rouble has still not recovered all its losses since last autumn. It continues to trade at an approximate rate of 65 to the dollar, which is well below the peak level it achieved last year. Conceivably government action is somehow keeping the rate of the rouble down, though if so it is not clear how this is being done.
Despite inflation turning out lower than it expected, the Central Bank continues to predict growth of no more than 1.3% next year. The Central Bank’s growth forecasts have consistently turned out unduly pessimistic. However its growth forecast for 2017 suggests that though more interest rate cuts are on the way, it intends to continue with its tough interest rate policy until inflation finally hits its target of 4%.
Looking beyond 2017, people like Kudrin and Belousov – both now members of Putin’s team of economic advisers – are now predicting stable growth rates of 3 – 4% in the near term, even without the reforms they say are needed. This suggests that they expect interest rates to be cut further still after 2017 once inflation fully stabilises at the level of the Central Bank’s 4% target.