A few weeks after the Russian Central Bank indicated that it was unlikely to cut its key rate before mid year, a cluster of good economic news have caused it to shave its key rate down today from 10% to 9.75%.
To be clear, this is a token cut that will not by itself make any difference to the state of economy. Its importance is that it clearly signals that more cuts are on the way. That may in itself act as a spur to growth, consolidating the recovery.
The state of Russia’s economic statistics is at the moment one of confusion, with Rosstat – Russia’s state statistical agency – admitting what many people – including myself – always suspected, that it had previously seriously overestimated the severity of the recent recession, which was significantly shorter and shallower than it had previously said. Rosstat is now in the process of undertaking a comprehensive review both of its methodology and of its earlier calculations. However this process is far from complete, so it is difficult at present to give a precise picture of the current state of the economy.
However one figure that does appear to be secure is that annualised inflation as of 20th March 2017 had fallen to 4.3% – far better than forecast – and with Russia now regularly recording weeks of zero inflation (as it has again just done) annualised inflation is expected to continue falling further and faster than anyone expected and is likely to hit the target figure of 4% before long.
This fall in inflation made it all but impossible for the Central Bank to resist calls to reduce its key rate, but the fact the Central Bank made only a token cut of 0.25% shows it is leaving nothing to chance and is keeping its powder dry.
News of the rate cut was accompanied by an unusually optimistic report on the economy from Elvira Nabiullina, whose position as Central Bank Chair has just been extended by President Putin.
On the question of the overall condition of the economy and of the course of the recent recession Nabiullina had this to say
The updated Rosstat data suggest that the downturn in the Russian economy was not so deep in 2015-2016 and the economy saw a recovery earlier than expected. If we compare this situation with the overall economic crunch of 2008-2009, we can see that GDP dropped over 10% at the time, while in 2015-2016 it contracted by slightly more than 3%, given that the oil price drops were similar. We will be able to revise our estimates in April, when Rosstat publishes its updated statistics for 2016. Preliminary estimates suggest that GDP started showing quarterly growth as soon as 2016 Q2 (Q3 according to previous estimates). Annual industrial production growth entered positive territory in the first quarter of last year. Estimates of industrial production statistics for the beginning of this year need calendar adjustment. This February is two working days shorter than last year, which results in different volumes. If adjusted for this factor, industrial production continued to expand, adding more than 1% YoY in February. This calendar effect will also manifest itself in overall Q1 readings.
After a long period of instability, we can see clearer signs of investment recovery. Production and imports of investment goods are growing. Surveys confirm that investment demand is on the rise. Businesses are building up stockpiles as they expect demand to recover. These expectations may soon prove right. We predict consumption to increase in annual terms as soon as the second quarter. It will come after expansion in production and will not create inflation risks.
A never stated fact about the Russian economy is that every contraction since 1991 has been shorter and shallower than its predecessor. The contractions of 1991 and 1998 were existential crises that threatened the very existence of the Russian state, whilst the 2008 recession, though significantly less severe, was still (as Nabiullina’s figures show) a very steep recession indeed and something of a near death experience. The latest 2014-2015 recession was by these standards not merely short and shallow, but qualifies as Russia’s first ‘normal’ recession. As I have discussed many times, its overall effect has been to leave the Russian economy fitter and stronger than it was before.
Nabiullina however confirms that for the time being the Central Bank is taking nothing for granted and that it will continue with what she euphemistically calls its “moderately severe monetary policy” (actually by far the toughest monetary policy of any of the major economies) in order not just to bring down inflation to the annualised target figure of 4% but to hold it there. Inevitably in the short term that will reduce the rate of economic growth
As I have mentioned on several occasions before, we are seeking more than a one-time reduction in price growth to 4%. It is important to anchor inflation near this level in future. For this reason we call this situation price stability, i.e. sustainably low inflation.
To maintain inflation close to its target level, moderately tight monetary policy may be needed over a two-three year horizon. This is necessitated by the still high sensitivity of inflation to one-off factors, as well as its inertia and elevated inflation expectations. As they stabilise close to the target level of inflation, prices are expected to be less responsive to various short-term factors. These new conditions would see no need for additional tightening in the monetary policy stance to ensure that inflation holds near 4%.
This conservative strategy in monetary policy may appear unattractive short-term; however it will enable us to deliver on a more sustainable result in the mid-term, that is, deliver on the objective to establish in Russia a low price and cost growth environment – such that favours both households and businesses, as well as the overall economy.
It seems that a steep and sustained reduction in Russia’s real interest rates (which are now much higher than they were during the inflation spike of 2015) is not to be expected before the end of the decade, with the plan being for accelerated investment led growth in a low inflation environment thereafter.
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