As the US Federal Reserve Board raises interest rates and the European Central Bank starts to taper off its quantitative easing programme, the Russian Central Bank is maintaining its tough monetary policies.
As I predicted, fears that inflation would rise significantly in Russia in December in the run up to the New Year holiday have been proved wrong. Weekly inflation remains stuck at 0.1 percent. Annualised inflation has now fallen to 5.6 percent from 5.8 percent at the end of November, and the Central Bank is now predicting that inflation for the whole year will be between 5.5 percent and 5.6 percent.
As I have pointed out previously, this is a post-Soviet record. In fact it is better than this since inflation in the last years of the USSR was certainly running above 5 percent though the fact was masked by fixed prices (it expressed itself instead in empty shelves in the shops).
Notwithstanding this fall in inflation the Central Bank chose at its latest meeting in December to keep its main interest rate at 10 percent.
This means that real interest rates in Russia are continuing to rise, and are now over 4 percent.
Whilst there is certain to be an interest rate cut at the next Central Bank meeting in late January, all the indications are that this will be small, and that real interest rates in Russia will remain very high.
What is striking is that the Central Bank is maintaining its tight monetary policies despite the continued fall in inflation, and the continued failure of the worst case scenarios it regularly prophecies to come to pass.
The US Federal Reserve Board’s decision to raise interest rates has had none of the dramatic impact on international markets that its previous increase did last year. Oil prices in particular have failed to drop despite the widespread doubts about whether the recent agreement between OPEC and Russia to cut oil production will hold. This fact points more than any other indicator to the probability that the fall in oil prices which began in the summer of 2014 has now run its course.
With oil prices apparently stabilising at around $50 a barrel against the Russian Central Bank’s prediction that they would fall to $40 a barrel, concerns about the Russian budget – which were always wildly overstated – are dissipating.
Importantly the exchange rate of the rouble seems to be becoming increasingly stable, with the rouble brushing off the effect of US Federal Reserve Board’s rate increase. Instead of money leaving Russia to benefit from the US rate increase and the expected rise in the value of the dollar, it has been pouring into Russia instead, as international investors seek to benefit from the high interest rates there and look forward to the Trump administration’s lifting of sanctions.
As it happens the flood of money into Russia is by no means unalloyed good news, with much of it ‘hot money’ that might leave as quickly as it comes, and with the flood of money risking a rise in the rouble’s exchange rate, which could cut the economy’s competitiveness. The Central Bank is already seeking to allay concerns about this, which is a sure sign it is concerned. However the problem is still very much in its early stages, and there is no sense for the moment that it is out of control.
What is perhaps most surprising is that despite these exceptionally high real interest rates, Russia’s recovery remains on track. Output in all the economy’s productive sectors is now growing, in the farm sector dynamically so, with only continued falls in the retail sector (the result of still declining real incomes) holding the economy back.
The economy’s ability to grow despite sky high real interest rates that would crush most other economies is a tribute to the Russian economy’s resilience and its very low level of debt.
It also ensures, as the economic recovery slowly gathers pace, that pressure for any change in economic direction will fall on increasingly deaf ears inside the government.