On October 31st of the current year the Central Bank announced about the increase of the key interest rate on 150 basis points from 8 to 9.5% at once. The Bank of Russia explains such decision with the sharpening of external conditions in September and October 2014. Reduction of prices on oil and the toughening of sanctions against a number of large Russian companies were accompanied by the ruble depreciation that has led to a growth acceleration of consumer prices together with the food embargo.
According to the expectations of the Central Bank, the inflation in Russia will rise beyond 8% until the end of the first quarter of 2015 and the economic growth rate will be close to zero. So, the Bank of Russia estimates the annual GDP growth rate in the third quarter of the current year was 0.2%. At the same time, the banking regulator notes that deceleration in economic growth has no significant restraining influence on inflation changes yet. The Central Bank also notes that these phenomena have structural character.
At the same time, representatives of the Central Bank point out that absorption of the production factors (labor force and competitive manufacturing capacity) is on a high level. However, labor capacity decelerates due to the decrease in supply of labor force because of long-term demographic changes of previous years.
The Bank of Russia notes a disinvestment in fixed capital among the external factors that have a negative impact on economic activity. That happened because of the restricted availability of long-term financial resources and the requirement toughening for quality to credited parties of Russian banks. In such a case there is a cooling of consumer demand resulting from the growth slowdown of real wages and retail lending.
In addition to this, the banking regulator raised the rates of the following instruments for bank liquidity extension: continuous operations (fixed interest rates) from 9% to 10.5%, and the three month auctions for credit extension provided by non-market assets from 8.25 to 9.75% and deposit operations from 7 to 8.5%.
It bears reminding that it is not the first increase of the key interest rate this year. The same resolution was carried in March by the banking regulator with the raising of interest rate from 5.5% to 7%. Then the interest rate was increased twice on 50 basis points. However, for the first time the banking regulator announced its readiness to move to the quantitative monetary easing in the case of external conditions improvement and the formation of a stable trend to the decline in inflation.
Since the 10th of November 2014 the Bank of Russia has canceled the corridor of bi-currency basket and regular currency interventions, whereby it has left the ruble «free floating». Now its rate will be determined only by market laws. However, the regulator has reserved the right to enter the market without notification in case of financial stability threat.
All of this happened on the back of unprecedented ruble devaluation towards other currencies of the world: when in autumn months the rate of USD and EUR renewed historical peaks practically every day. As the result, since the beginning of the year the national currency had gone down in value in relation to USD by 46,6%, to EUR – by 31,6%.
Primarily the CB of the RF has planned to go to the floating rate in 2015, but current situation hasn’t left an alternative: today significant reserves are needed to support the corridor, which expenditures would be just senseless.
The factor of declining oil prices – the main export article of Russia - exerts pressure on the ruble, such rapidly falling in price, first of all. As far back as in July Brent crude oil was traded at the rate of 115 USD per barrel, and now it costs less than 80 USD and continues to go down. Besides that, profiteers, aiming at making money out of strongly volatile market, make their contribution to observed processes.
On the one hand, weak ruble sets off losses of the budget from short-received export earnings, on the other hand - companies, obtaining credits on foreign markets, will feel extra costs of loan servicing first-hand, which they finally will put on consumer by way of rising prices. On top of that, the production itself, purchased abroad, has become significantly expensive – all of this will lead to increase of the inflation inland and reduction of real salaries and pensions of population even in the nearest time.
That is why the proceeding to floating rate looks today as a belated decision. Positive consequences of this step will be possible to be experienced by stabilization of external environment and reduction in geopolitical tensions around Ukraine.