Russian Central Bank doubts monetary policy of Fed and ECB


The Russian Central Bank doubts the monetary policy of its peers, stating that the country has to apply other tools to tackle the problems. What is the current situation in Russia and how does their central bank deals with the recession? 

23 September, AtoZForexAccording to Elvira Nabiullina, Governor of Central Bank of Russia, problems that Russian economy is currently encountering are different from those facing the EU, the US, and Japan. Hence, the approach undertaken by the Russian Central Bank needs to be different. Furthermore, the governor questioned if tools applied by other central banks were still effective.

“Whether (other) central banks still have in their possession the types of tools to influence this situation (is the subject of a very broad discussion).”

Russian Central Bank doubts monetary policy: Comments of Elvira Nabiullina

Russian Central Bank doubts monetary policy, including ease of monetary policy and QE, that other central banks have been recently applying. According to Elvira Nabiullina, though the tools attempted to boost liquidity, economic growth, and investment, they did not inevitably turn into an investment in the real economy. Rather, raised the liquidity in financial markets, causing concerns bond and equity bubble to burst after the QE program would be ceased and the monetary policy “normalized”. Also, the governor alerted that the volatility might remain high in financial markets due to the continued monetary policy easing in many countries. But she admitted that a lot “very moderate, cautious policy, trying to manage expectations and to create as few surprises for the markets as possible.”

Which approach does Russian Central Bank take?

In the meantime, Japan and the EU are attempting to increase inflation and growth, the Russian Central Bank is trying to fight high inflation and devaluation of the ruble, that were caused by a drop in the oil price and international sanctions. In an attempt to aid the economy, the bank firstly decided to deal with the inflation, rather than to use lower interest rates to boost the growth. Now, the inflation rate is slowly declining.  Due to it, the central bank decided to cut the interest rates to 10 percent last week.

Furthermore, the central bank mentioned that it would continue its “gradual rate cut strategy” to decrease the inflation rate to 4 percent by 2017. The bank projects that the objective would be reached by late 2017. Next rate cuts would happen in the first or second quarter next year. Elvira Nabiullina commented that:

“Although inflation has been going down in accordance with our forecasts these have been affected by external factors and a stronger ruble and a good crop yield, and in order to ensure that inflation will continue to go down, that inflation expectations will be decreased and this trend strengthens, we have sent a signal to the market saying that our policy is going to remain moderately tough in order to ensure that inflation reduces to our target level”.

See also: Why is Oil dropping after days of strong sessions?

Russia needs structural reforms

According to Ms. Nabiullina, although the economy appears to be improving, such issues as a lack of investment and necessity for structural reforms have to be addressed. The governor mentioned that the lack of investment was caused by the structural limitations and the investment climate rather than high-interest rates. In addition, Elvira Nabiullina stated that Russian central bank’s monetary policies have capabilities to deal with the external shocks. Therefore, the main challenges that have to be addressed are the internal ones.

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