Central Bank of Russia capitulated to inflation?
News Newsland: Central Bank of Russia capitulated to inflation?
On Thursday, the Russian Central Bank for the fifth time this year raised its key interest rate: from 5.5% in January 2014 to 10.5% in December. * Economist Alexei Mikhailov believes that this is the way to a standstill, and real output will either increase interest rates several times, either as a sharp devaluation of the ruble.
The Central Bank made a bid to curb inflation, regardless of the risk of increasing the economic downturn. In this case, the same Russian Central Bank predicts zero economic growth in the next two years. It seems that this path leads to a dead end.
Inflation unexpectedly CB burst out of control in August and September of this year: firstly, because of the Russian kontrsanktsy (restrictions on imports from countries that have imposed sanctions against Russia) and, secondly, because of the rapid devaluation of the ruble . Inflation is projected to peak now I quarter of 2015, and it will become a two-valued (over 10% per annum).
For the first time in this century in Russia can talk about stagflation (stagnation, ie zero growth coupled with high inflation). This means economic policy impasse because measures against stagnation disperse inflation and anti-inflation measures - strengthen the economic downturn. Central Bank made a choice - to fight inflation.
But the paradox lies in the fact that the Central Bank may keep prices only monetary methods (interest rate rise, restrictions on the growth of the money supply). This is effective when it comes to inflation, demand, ie when the expansion of demand caused by loose monetary policy, pulls a price.
However, the acceleration of inflation in Russia is clearly a monetary nature, he pushed forward pressure on the cost side (growth of tariffs for natural monopolies, reducing the supply of goods due to the sanctions, the devaluation of the ruble). Under these conditions, the fight against inflation by monetary methods is extremely inefficient, though equally harmful to economic growth.
Bank understands and predicts the next year inflation is only slightly less than the inflation rate this year - 8%, compared to about 10%. Nevertheless, no other strategy of the Central Bank can not offer.
This is due to the fact that any attempt to loosen monetary policy to stimulate the economy rest on the depreciation of the ruble. Central Bank loans are not the real economy, and highly profitable speculative game in the currency market. And there is nothing to oppose this CBA.
Align the situation with the help of interest rate parity is impossible - for the last month the ruble fell by 18%, to ensure equal profitability would have to raise its key interest rate to 200% instead of 10.5%.
Any administrative action in the market (compulsory sale of currency restrictions on the export of capital) will obviously only have the opposite effect - the acceleration of capital flight from Russia.
It's a trap in the trap, and the Central Bank at its very center.
The output can be found only if beyond monetary paradigm. If a node fails financial contradictions unravel - it needs to be cut.
This is a sharp increase in the key rate (at times, but not the interest), or again outstripping the sharp devaluation of the ruble (held devaluation by 50-60% this year is not enough).
But if the first has virtually no positive effects, the second gives exporters' revenues, restricts imports and stimulate import substitution, increase budget revenues.
Market expectations of further appreciation of the ruble can make an effective and safe loosening of monetary policy. All this will stimulate economic growth.
But to the sharp devaluation of proactive central bank is very difficult for political reasons. At the persistence of the current monetary policy Russia is waiting for a lost decade - similarly lost twentieth (1990-2000 th years) in Japan with zero growth in the economy and prices.
Alexei Mikhailov
News Newsland: Central Bank of Russia capitulated to inflation?
On Thursday, the Russian Central Bank for the fifth time this year raised its key interest rate: from 5.5% in January 2014 to 10.5% in December. * Economist Alexei Mikhailov believes that this is the way to a standstill, and real output will either increase interest rates several times, either as a sharp devaluation of the ruble.
The Central Bank made a bid to curb inflation, regardless of the risk of increasing the economic downturn. In this case, the same Russian Central Bank predicts zero economic growth in the next two years. It seems that this path leads to a dead end.
Inflation unexpectedly CB burst out of control in August and September of this year: firstly, because of the Russian kontrsanktsy (restrictions on imports from countries that have imposed sanctions against Russia) and, secondly, because of the rapid devaluation of the ruble . Inflation is projected to peak now I quarter of 2015, and it will become a two-valued (over 10% per annum).
For the first time in this century in Russia can talk about stagflation (stagnation, ie zero growth coupled with high inflation). This means economic policy impasse because measures against stagnation disperse inflation and anti-inflation measures - strengthen the economic downturn. Central Bank made a choice - to fight inflation.
But the paradox lies in the fact that the Central Bank may keep prices only monetary methods (interest rate rise, restrictions on the growth of the money supply). This is effective when it comes to inflation, demand, ie when the expansion of demand caused by loose monetary policy, pulls a price.
However, the acceleration of inflation in Russia is clearly a monetary nature, he pushed forward pressure on the cost side (growth of tariffs for natural monopolies, reducing the supply of goods due to the sanctions, the devaluation of the ruble). Under these conditions, the fight against inflation by monetary methods is extremely inefficient, though equally harmful to economic growth.
Bank understands and predicts the next year inflation is only slightly less than the inflation rate this year - 8%, compared to about 10%. Nevertheless, no other strategy of the Central Bank can not offer.
This is due to the fact that any attempt to loosen monetary policy to stimulate the economy rest on the depreciation of the ruble. Central Bank loans are not the real economy, and highly profitable speculative game in the currency market. And there is nothing to oppose this CBA.
Align the situation with the help of interest rate parity is impossible - for the last month the ruble fell by 18%, to ensure equal profitability would have to raise its key interest rate to 200% instead of 10.5%.
Any administrative action in the market (compulsory sale of currency restrictions on the export of capital) will obviously only have the opposite effect - the acceleration of capital flight from Russia.
It's a trap in the trap, and the Central Bank at its very center.
The output can be found only if beyond monetary paradigm. If a node fails financial contradictions unravel - it needs to be cut.
This is a sharp increase in the key rate (at times, but not the interest), or again outstripping the sharp devaluation of the ruble (held devaluation by 50-60% this year is not enough).
But if the first has virtually no positive effects, the second gives exporters' revenues, restricts imports and stimulate import substitution, increase budget revenues.
Market expectations of further appreciation of the ruble can make an effective and safe loosening of monetary policy. All this will stimulate economic growth.
But to the sharp devaluation of proactive central bank is very difficult for political reasons. At the persistence of the current monetary policy Russia is waiting for a lost decade - similarly lost twentieth (1990-2000 th years) in Japan with zero growth in the economy and prices.
Alexei Mikhailov
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