Cheaper only in the budget – Newspaper Kommersant No. 172 (7373) dated 09/17/2022
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At the Friday meeting of the Board of Directors of the Bank of Russia, the issue of reducing the key rate or maintaining it was discussed, but at the next meeting in October 2022, all three possible options will probably have to be discussed. The new rate is 7.5% per annum, according to the Central Bank, this is a neutral level, while it is not obvious where exactly inflation will move in October, while by the beginning of 2023 the Bank of Russia expects more inflationary pressure to increase. Fundamentally, money will not be cheaper – if we are not talking about budget money: the Central Bank promised to take into account their abundance in the rate.
The short-term equilibrium level of the key rate is higher than the medium-term one – this is the main thesis from the press conference Chairman of the Central Bank Elvira Nabiullina, dedicated to the meeting of the Board of Directors on the key rate. Central Bank decision at the rate, the market guessed exactly – 50 basis points, a decrease from 8% per annum to 7.5%. According to the head of the Bank of Russia, there were three decisions “on the table” of the council: to keep the rate unchanged, to reduce it by 0.25 percentage points, to reduce it by 0.5 percentage points.
The Central Bank obviously owes the first two options to the results of the September Infom survey on inflation expectations, which confirmed (see “Kommersant” dated September 15) their statistically significant increase not only in August, but also in September 2022. The Bank of Russia does not give an unambiguous explanation for the fact that against the backdrop of the seasonal deflation that was still ongoing in the first autumn month, the revival of consumer demand, with a relatively stable ruble and short-term economic forecasts that were better than expected earlier, estimates of current inflation still grew, and did not decrease. , and the very fact of rising expectations worries him.
Nevertheless, the decision to reduce the key rate was made to the maximum possible: the head of the Central Bank announced that this action had reached a neutral rate level.
According to the Bank of Russia, it is higher in the short term than in the medium term – as the economy adapts to the new conditions of foreign trade (sanctions), it, according to the Central Bank, should decrease. Nevertheless, at least now, according to his calculations, the monetary regulator has practically reached exactly the point in the movement of the rate, at which, with unchanged forecasts, it practically does not need to be changed: the balance of pro-inflationary and disinflationary risks, according to the Board of Directors of the Bank of Russia, is now balanced. Therefore, in the council’s statement there is no usual indication that the possibility of a reduction will be considered at the next meetings: the space for reduction itself, according to Elvira Nabiullina, has been greatly reduced, and at meetings on October 18 and later, an increase in the rate may be considered.
The Central Bank’s estimates of annual inflation in 2022 have been extraordinarily adjusted – now it is 11-13%, the regulator is considering (but has not yet done so) the possibility of correcting the forecast for annual GDP: now it is falling in the range of 4-6%. In general, there are a lot of conditionally optimistic moments in the statement of the Central Bank: the situation is developing better than the regulator expected in July, business activity is higher than expected (although not uniformly). However, the Central Bank’s model, within which it explains the current dynamics of macro indicators, has become noticeably more complicated. “Today’s weak inflationary pressure is due to the effects of economic restructuring. Earlier we said that it mainly increases inflation. Now we see that the situation is more complicated: structural adjustment can be accompanied by disinflationary processes. Thus, the effects of sanctions on exports and imports can be both pro-inflationary and disinflationary and can change direction over time” – this is about a third of the full quotation of the Central Bank Chairman’s explanation of how the ruble exchange rate, sanctions restrictions, prices, output and employment. The conclusion from this rather difficult moment sounds like this: “We believe that the restructuring of the economy will be accompanied by an acceleration in price growth, despite separate periods of their correction.”
In other words, inflation expectations in September 2022 may be a harbinger of a future increase in inflationary pressures, so the rate cut can be conditionally considered completed or at least completed.
How this is consistent with the thesis that the medium-term equilibrium level of the rate is lower than the current one (i.e., on the horizon of six to nine months, the current neutral monetary policy, if it remains unchanged, will turn into a tight one and will require a reduction in the rate) – additional explanations are required.
However, in general, the next few months are a period of uncertainty. So far, two alternative pictures of what is happening can be reconstructed without contradiction from the explanations of the Bank of Russia.
- First: the future short-term (up to six months) increase in inflationary pressure is a kind of “overheating” of the economy, in which the effect of sanctions was overestimated, the support measures taken may be somewhat excessive, the situation will stabilize faster than expected.
- Second: what is happening is a consequence of the economy’s resistance to sanctions, the impact of which will further increase somewhat, and the peak of the recession is shifting to the beginning of 2023. In this case, we should talk about stabilization slower than expected, about a greater than expected reduction in the potential for GDP growth with a high inertia of the economy, while the generating output (conditionally, unevenly) is higher than the current potential.
If you wish, you can pick up arguments in favor of both versions in the statements of the Central Bank, but it seems that the Bank of Russia is leaning towards the first one.
At the same time, the regulator is definitely wary of the possible stimulation of GDP growth from the budget, which carries similar risks in both the first and second scenarios.
In principle, this thesis was indirectly stated by the Bank of Russia more than once, but on Friday Elvira Nabiullina spoke it outright: from the point of view of the monetary policy of the Central Bank, the volumes of money produced by budgetary redistribution and government spending, the Bank of Russia will be forced to keep the key rate higher. At the same time, in the models of the Central Bank, government spending for 2023–2025 is based on the July forecasts of the Ministry of Finance, that is, any additional ruble of government spending in the budget stimulus currently being discussed in the White House will have an equivalent in raising bank loan rates and the key rate.
“A long-term looser fiscal policy shift means the central bank will have to keep rates higher to ensure price stability.” This statement by the chairman of the Central Bank is a signal not so much to the market, but to a part of the extended government, which insists on the need to finance “breakthroughs” and accelerate the adaptation of the economy. Meanwhile, the medium-term shift – the actual increase in the “cut-off price” of oil in the budget from $40-45 per barrel to the target of $60 – has already occurred.
There are many more subtle points in the adjusted view of the Bank of Russia on the prospects for the coming year, for example, the question of prices and volumes of Russian exports in the event of a winter gas crisis in the EU, a possible new change in savings preferences (the Central Bank notes an increase in savings, possibly forced and temporary, which may be replaced by an increase in consumption – and, probably, an increase in prices), the problem of limiting investment imports (it is recognized in the theses of the Central Bank, but the degree of its influence on supply, apparently, cannot yet be assessed). However, so far discussions in the general government about such problems have inevitably led only to proposals to increase the tax redistribution a little more, compensating businesses for this by reducing the regulatory burden and administrative costs. It is clear that this process has a limit. Perhaps the announcement of the Central Bank that for price stability while satisfying the requests (mainly) of the public sector for new state support, it will be necessary to put up with high loan rates, should be regarded as an indication of approaching this limit.
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