The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.
Russia’s Economics Ministry claimed that today Monday 15th May 2017 Russia achieved several months in advance its 4% annual inflation target.
The Central Bank reportedly is not disputing this claim, though it says more cautiously that the annual rate of inflation on 10th May 2017 was between 4.0% and 4.1%. It has also said that the fall in inflation has been aided by ‘unexpected factors’ which might well reverse.
The background to this is that the Central Bank remains committed to its high interest rate policy, and does not wish to be pushed by the lower than expected level of inflation into cutting interest rates more quickly than it wants.
It has followed this up with the truly remarkable claim that a rise in the value of the rouble caused by Russia’s high interest rates will not reduce industrial competitiveness, but might actually increase it
In the modern world of global production chains, the exchange rate ceases to be a source of competitiveness for a growing number of goods. It is very rare if an industrial commodity is fully developed and produced in only one country. Competition in the modern world shifts to competition in quality, production effectiveness and image of goods. Attempts to compete only in terms of price will eventually lead to growth of technological gap.
In reality the correlation between an excessively strong currency and a loss of industrial competitiveness over time is well understood. There is no reason to think the recent inflation fall is likely to reverse. If anything Russia’s inflation rate during the summer is more likely to fall than rise, and with inflation at record low levels in Russia’s post-war history pressure on the Central Bank to cut interest rates is now bound to increase.