the Past five years show how powerful a tool for managing inflation and business activity is the interest rate policy of the Bank of Russia. But the higher the impact, the stronger and responsibility only in theory the Central Bank every time accurately set the interest rate at an optimal level and perfectly transmits signals about its tactics and public companies. In practice, internal data and external events invariably surprises, and the language spoken at Neglinnaya, 12, differs from the dialects prevalent outside the Central Bank.
We propose to make three steps in the development of the monetary policy of the Bank of Russia that it was near to the international economic thought, and Russian reality:
1) to publish indicative forecasts of the key rate corresponding to the baseline and other projections;
2) to include imputed rent in the calculation of the consumer price index;
3) to expedite the review of equilibrium rates and to change the approach to the transfer of information markets about its level.
About once in a month and a half the markets ‘ attention is riveted to the decision of the Board of Directors of the Central Bank’s key rate. In response to the outcome of such meetings can be understood, and they found unexpected or, on the contrary, totally expected. More difficult to assess the reaction of market of medium – and long-term rates on the decision on the key rate, and is much more noticeable in their reaction to the statements of the Chairman and other executives of the Bank of Russia on the state of the economy and the possible forks in the monetary policy in the coming quarters.
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Look at a recent example: on 6 September, the Bank of Russia decided to reduce the key rate to 7%, this is the third rate reduction in 2019 remains virtually unnoticed by the market OFZ and does not lead to a marked decrease in the value of money. However, in early October, the situation is changing: low inflation and weak business activity make the leadership of the Bank of Russia to make more assertive statements about their growing resolve to reduce interest rates – and markets immediately react to these words. Subsequently, in October, the Bank of Russia takes the decision to accelerate the reduction and the reaction is again very low-key.
Conclusion: communication of the Bank of Russia, the statements of its leadership on regulatory policy have a decisive role for market expectations. It is important to modernize the mechanism of the transfer of such information to the market, to make it more transparent, less dependent on the accuracy of selection of the Bank of Russia the right words. The modern approach of leading Central banks is to publish the forecasted trajectory of the key interest rate by one or more scenarios.
greater certainty of medium-term level of the key rate would stimulate borrowing under a floating rate, would increase the efficiency of the transmission mechanism of monetary policy would increase the transparency of monetary policy and its credibility.
One of the issues that concerned the Bank of Russia is a large discrepancy between inflationary expectations and actual statistics. This discrepancy affects the credibility of the Central Bank.
what is the reason for this discrepancy? Often put forward hypotheses to explain its shortcomings in the perception of inflation by the consumer: he estimates the price increase is only a narrow group of goods of daily consumption slowly revising their perceptions about the normal rate of growth of prices and living ideas of the past, sharper and reacts better to remember the significant price increases, and price reductions quickly forget.
Rarely discusses the possible objective differences in the actual structure of monetary expenses of citizens and how their estimates of the statistical service. One of the major gaps here, in our opinion, the assessment of housing costs.
thus, in the structure of the consumer price index for 2019 to the cost of rental housing are in the order of 0.71% from the basket, approximately an additional 1.5% of the weight of the cost of housing repairs. This is an extremely low proportion, and, most likely, the underestimation is the difficulty of measuring the size of the rental market due to its not too high transparency.
however, such limitations of the available data do not interfere with Rosstat to estimate the contribution of rent, including imputed to homeowners in GDP.
Conclusion: the overall level of consumer prices in Moscow grew by 3.7% in annual terms in November, while the average lease rate meter of housing increased by 12%. The inclusion of imputed rent in the consumer price index and its dynamics into account when deciding on rate will be an important step towards the understanding of the actual circumstances of the consumer.
the Balance rate
One of the elements of communication of the Central Bank in his monetary policy is the estimate of the equilibrium rate for our economy. Currently, the communication of the Bank of Russia there is a certain paradox: at the same time declared insufficient data for accurate assessment of the level of equilibrium rates, but emphasizes the assessment of the adequacy of 6-7%, received in 2016 and the commitment to it.
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How compatible are these two points? How can the evaluation obtained three years ago, OSTto be sufficiently reliable for the conclusion about the neutrality of monetary policy, and three years of new data, in which chronic inflation remains below the target level, not to indicate the need of revision?
the Bank of Russia said on the possible revision of this assessment in the future, when data will be sufficient. We support the resolve of the regulator to critically review their assessment, but with one caveat: a discrete approach to the revision of important landmarks contributes to the unnecessary excessive price volatility and interest rates. The information that the Bank of Russia has revised the estimate of the equilibrium rate, probably will have a greater impact on the market than the decision about a small reduction of the key rate.
Conclusion: in our opinion, more productive to wait for the next signs of uncertainty of the current evaluation, and gradually to revise it as new data.
Mechanism of such a review of the equilibrium rate could be the publication of indicative trajectory the key rate in the reports of the Bank of Russia. In the far horizon of these forecasts, inflation and economic growth come to their sustainable values, and therefore, could be used and long-term forecast of the key rate to assess its neutral level.
On the forecast for 2020
first, we expect a recovery in business activity. The growth of real government spending, the revitalization of infrastructure and other projects, the emerging recovery of consumption, some positive signs from the investment of the import gives the grounds to expect economic growth of 1.6–2%.
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second, we expect a normalization of inflation. We agree with the Bank of Russia and expect growth of consumer prices for the year to 3.5–4%. The main trend is accelerating the growthand prices for non-regulated services and a reversal in the prices of food items. Less likely, but an interesting story is the completion of lower prices for consumer electronics – this may be the case, for example, a certain strengthening of the ruble against the yuan.
thirdly, we expect to continue to reduce the key rate. At year-end it will fall, according to our estimates, to 5.75%, and it will happen in the first half. We estimate the equilibrium key rate of 5.5% given the decline in the volatility of inflation in recent years and increases the predictability of economic policy.
the Authors – chief economist of “VTB capital” in Russia and the CIS and head of the macroeconomic analysis of “VTB capital”.