12/9/2014: Bank of Russia Leaves Rates Unchanged

So Bank to Russia decided to maintain its benchmark rate at 8% today. The announcement is here http://www.cbr.ru/eng/press/pr.aspx?file=12092014_133319eng_dkp2014-09-12T13_29_04.htm. This was expected by majority of analysts: 17 expected no hike, 7 expected a 50bps hike and 1 expected a 25bps hike. My own view - tweeted out yesterday - that the decision could have gone in favour of a hike.

My rationale was (and remains the same for the next two-three months):

1. Russian sanctions against Western exports of food pushed up inflation and inflationary expectations. I wrote about this before on a number of occasions. As far as we know, early September CPI accelerated upward momentum. In July, when inflation shot up to 7.5% (well ahead of 5% annual target), the CBR responded with a hike and the Government revised its outlook for inflation (July decision raised rates from 7.5% to 8%). August figures (through September 8) suggest inflation has increased to around 7.7% and core inflation hit 8.0%.
2. Ruble weaknesses persist: the currency is now down roughly 5% on end-of-July figures. CBR's reluctance to intervene aggressively in the FX markets means the pressures are still building up.
3. Government policy favours higher inflation: the Government is pushing for a hike in VAT and for an introduction of a regional sales tax (ca 3%) on top of that. On the related, PM Dmitri Medveded held a meeting between cabinet ministers and a panel of Russian economists discussing various options for addressing fiscal risks. The group of economists invited was unanimously against the introduction of a regional sales tax, preferring to increase VAT instead.

Nonetheless, the CBR is clearly watching for any effects of July hike on inflation. As noted in the release, money supply growth fell off the cliff: down from 17.1% a year ago to 6.5% this year.

The CBR is also clearly concerned with the deposits situation in the banks, noting that higher rates create incentives for raising savings. This represents a policy of switching as much as possible of the lost funding from international markets (sanctions) into deposits funding.

The CBR has also revised its economic outlook which is now much gloomier than that of the Government. Utilisation capacity remains high, but labour productivity growth is sluggish, per CBR, which suggests that the CBR is more pre-occupied with structural weaknesses in the economy. The CBR now expects the economy to shrink by -0.2% y/y in Q3 2014 and expand by just 0.4% in 2014 overall. CBR outlook for 2015 is pretty dire too: GDP growth of just 0.9-1.1%.

With the above points in mind, it is pretty clear that CBR will have to continue raising rates in months ahead, so the current pause is just a temporary 'hold-back and watch' scenario. 

Meanwhile, the Economics Ministry stepped up its criticisms of the CBR - an open warfare that has been going on over the summer. CBR July hike was uncoordinated with the Government and was in a direct response to the CBR outlook forward, reflecting inflationary pressures on foot of trade sanctions and the risks arising from planned tax hikes. Worse, CBR deputy chairwoman Ksenia Yudayeva openly criticised the government for failing to take into the account the inflationary risks inherent in the proposed tax policies. The Government and the Economics Ministry are clearly unhappy with monetary tightening which comes amidst decelerating investment in the economy and at the time when Western sanctions have already severely restricted major banks' access to international funding markets. These restrictions are feeding through into retail rates and choking off already fragile credit growth.

Back in August, President Putin visibly backed the Economics Ministry in the fight with the CBR when he accepted the Economy Minister Alexei Ulyukayev's proposal that future inflation targets be set by jointly by CBR, his ministry and the Ministry of Finance. This comes on top of the already established consultative representation for the two ministries at the CBR board. So far, the CBR stuck to its medium term target structure based on inflation target of 4%+/-1.5%. And in today's note the CBR confirmed this target as still standing.

13/10/2013: Predictably, Russia pushes on toward ruble free float

One interesting note on Russian economy from recent news flow: the push toward free float for ruble continues, with the Bank Rossiy under new stewardship predictably continuing with the old policy objectives (as I predicted back in March: http://trueeconomics.blogspot.ie/2013/03/1432013-comment-of-appointment-of-new.html):

Latest news is that Bank Rossiy (Bank of Russia) broadened the band for interventions in ruble exchange rates to 3.1 rubles for euro/dollar basket - trippling the previous targets. The plan is still to get rid of the bands by 2015. Thereafter, inflation targeting (possibly with broader growth metrics in mind too) will be the main target. Side effect - expect dollar (and euro) reserves to rise on this move as interventions become less frequent.

21/6/2013: Dukascopy TV interview

My interview with Dukascopy TV, Switzerland on Fed's FOMC and monetary policy dilemma, G8 and its implications for Europe and Ireland, and the Russian economy: http://www.dukascopy.com/tv/en#104517 and http://youtu.be/ir9701EHeOU

14/3/2013: Comment of the Appointment of the New Governor of the Bank of Russia

Surprise nomination of Elvira Nabiullina (economic policy adviser to President Putin) as the incoming Governor of the Bank Rossiyii (Bank of Russia) prompted some speculation as to what this all means for the CB interest rates policy. Ms Nabiullina will take her position in June, subject to the approval by Duma (Lower House of the Russian Parliament). Here are my comments to the Central Banker on the topic:

There is no doubt that Ms. Nabiullina is well suited for the job of the Governor of the Bank of Russia both in terms of her qualifications and her knowledge of the Russian economy, economic policy formation and, in particular, the fiscal aspects of the policies. Ms Nabiullina also brings to the table a longer-term reformist perspective on the Russian economy - a much welcomed development especially given the overall environment of moderating inflationary pressures, slower and more sustainable growth rates, lower reliance in growth on domestic consumption and credit, and relative successes in liberalising foreign exchange rates policies recently delivered by the Bank of Russia. 

Perhaps the only three potential critical points in which Ms Nabiullina's appointment can be considered at this time relate to her close connections to the current Administration and her lack of experience in monetary policy and economics, as well as her predominantly applied and policy-focused knowledge of economics. 

The first criticism, while warranting some caution, in my opinion is over-played at this time. Following the sharp correction in economy in 2009, Russian economic environment has improved significantly along structural trend. This suggests that previously present tensions between fiscal and monetary policies have dissipated, as evidenced by the overall successful (albeit still incomplete) execution of longer-term monetary policies objectives by the Bank of Russia in 2011-2012. I do not expect significant fiscal/monetary policy tensions to arise in 2013, allowing Ms Nabiullina sufficient time to establish her relative independence from the Executive branch of the Russian Government. One critical area of the policies overlap is in the area of increasing foreign investment inflows and here too, the Bank of Russia and the Executive branch are on the same page.

It is also worth noting that Bank of Russia core policy targets: reduced inflation and free float for the ruble are supported by virtually all political parties in the Duma and by the Executive branch of the Government. Lastly, completion of structural correction period in Russian banking sector is also politically popular and is unlikely to cause much of a rift with Ms Nabiullina's Governorship.

The second and third areas of criticisms are more important in my opinion. 

Bank of Russia is engaged in continued process of freeing ruble exchange rate regime while simultaneously pursuing the objective of reducing inflationary pressures in the economy extremely exposed to price volatility in oil and gas markets. It is worth noting that recent inflationary pressures in the economy were driven primarily by tariffs and strong ruble weighing on imports bills, including via household consumption. In the near term, I expect capex uplift to add to these pressures, offsetting moderation in consumption growth. Overall, however, longer-term inflation is abating and the wage inflation is likely to become the core driver of the monetary policy in H2 2013 and thereafter. This means that the job of the Governor in months to come will be technical in nature, rather than broad policy-based. Here, technical monetary skills are required.

Critical issue that Ms Nabiullina is likely to face once she takes over the reigns at the Bank of Russia is the overall tighter monetary policy space. With wage inflation and trade policy (trade balance) driven inflation, Bank of Russia simply lacks tools to reduce significantly inflationary pressures. Despite this, Bank of Russia, in my view, has managed to establish (over 2012) its rates policy as a credible tool for combatting core inflation. As the result, I expect Russian headline inflation to moderate from 6.9-7.1% in H1 2013 to 5.4-5.7% in H2 2013. If this trend is established in the next two-three months, we are likely to see Bank of Russia moving to ease the headline rate, starting with a relatively conservative move in Q2 2013 and possibly accelerating cuts toward the end of the year.