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Target selection: as the Central Bank misses the opportunity to support the economy
Material posted: Publication date: 28-10-2016
Slowing inflation may now be an acceptable price to pay for revival of the Russian economy.

In connection with the continuation of stagnation in the Russian economy and difficulties in obtaining foreign borrowings insistently demands to the Bank of Russia (CBR) to use its possibilities for the resumption of economic growth. CB replied to them in the draft guidelines for the single state monetary policy in 2017 and 2018 and 2019, approved by the government on 13 October. It recognizes that the Central Bank may be one of the drivers of economic growth, but not the main, because, as the document says, the success of interventions will largely depend on overcoming structural constraints. As explain the authors of the project, this refers to primarily "increase productivity and management efficiency, modernization of fixed assets and development of infrastructure, introduction of new technologies and formation of high-quality institutions."

The dilemma of the Central Bank

The Bank of Russia of course is right when it emphasizes the need for structural and institutional reforms. These are referred to for many years, but little is being done. This is the responsibility of the government in General, but it is important what kind of policy in these circumstances, the Central Bank is conducting. Its main goal is the reduction of inflation and, as stated in the project, to achieve the Central Bank is forced to pursue tighter monetary policy than would have in the absence of structural constraints. There is internal contradiction in such a policy. The reduction of inflation is intended to create conditions for increasing investment and growth, but the method of achieving the purpose contributes to the continuation of stagnation. The draft recognizes the risk of achieving the target "an unacceptable price "hypothermia" of the economy, reduction of its growth potential". In practice, however, this risk is not considered adequately.

CB comes from the fact that overcoming structural constraints not his problem. Of course, institutional reforms are intended to implement other government agencies. But for the elimination of structural restrictions are required and investment growth, which allows to increase production efficiency. But in the solution of this problem can and should contribute and the Central Bank. This becomes obvious if we go from the macro level to the level of commercial structures. When this level is analysed investment projects are taken into account the expected growth of prices and demand prospects, the possibility of borrowing on acceptable terms. These factors directly impact the Central Bank's policy — both monetary and monetary.

The saving rates of the Central Bank at a level substantially above the level of inflation contributes to lower prices and slow the devaluation of savings. At the same time, high interest rates keep the loan necessary for making large-scale investment projects. From the art of the Central Bank depends on finding the optimal balance of different objectives.

In the analysis of the investment project also takes into account the assessment of the possible value of the rouble exchange rate. The demand for future products in foreign markets increases with the weakening of the ruble, but if the project involves the purchase of imported equipment, materials and focuses on domestic demand, it is desirable strengthening of the ruble. Central Bank deviates from an optimal solution, renouncing direct influence on the exchange rate through foreign exchange interventions or currency purchases. In the analyzed paper argues that the floating exchange rate regime provides the optimal adjustment of the economy to the changing external conditions. The economy has really adjusted to the increased uncertainty that is the result of deregulation of course. Only hardly this adjustment is optimal, because it is primarily in the reduction of investments.

Reasonable price

Thus, the Central Bank may increase investment by reducing their interest rates, which affect the lending rates of commercial banks, as well as turning to the regulation of the exchange rate. However, this way he rejects the project, although acknowledges of course necessary to create conditions and incentives for investment. Central Bank argues that the rapid reduction in interest rates and the increase in Bank lending in the current environment may pose a systemic risk to economic stability and social well-being. This statement requires proof.

After slowing inflation may be an acceptable price to pay for economic recovery. However, the project says that hope is not necessary, and so could not solve the task of restoring economic growth, because Bank loan is not a major source of investment for most organizations. The persuasiveness of this argument, it would seem, makes the fact that the share of Bank loans in investment does not exceed 8%. But this is largely a consequence of the difficult conditions to attract loans, primarily high interest rates.

According to the Central Bank is unacceptable and the increase in the use of its special refinancing mechanisms, in which he, in particular, to refinance at a reduced rate and long-term Bank loans, invested in the financing of investment projects. Central Bank argues that large-scale expansion of monetary emission will be followed by a significant acceleration of inflation. But this statement in itself is insufficient without determining whether the increase in emissions is excessive. Even now, the Central Bank is to increase issuance to Finance budget deficits and the DIA, but inflation is falling. Monetary authorities are scheduled in the coming years to cut spending, the Central Bank for financing budget deficit. This means that their wider use in the development of production can not present an inflationary threat.

Central Bank acknowledges that the economy can grow and against the backdrop of relatively high inflation, but noted that such inflation is usually unstable and becomes more difficult to ensure its stability and predictability. However, in real current terms of possible growth, even when unstable inflation, is better than stagnation with low inflation.

Need a new goal

Nomination as the main goal of the activities of the Central Bank to reduce inflation was fully justified in the period of double-digit annual inflation and economic growth. But now, when inflation already slipping to around 6% and the economy mired in a swamp of stagnation, followed by a plan to put forward the problem of stimulating economic growth. The CBA considers that this task must first solve other government agencies. But if not, the Central Bank, then who? The Ministry of Finance focused on reducing the budget deficit by limiting spending. It is clear that with this approach, as it observes and the Central Bank, the stimulating effect of fiscal policy on the economy will be very limited.

The Ministry of economic development predicts preservation of stagnation for another 20 years that will not resolve the country is facing problems. It is not excluded that the monetary authorities fixing the real danger facing the country in the event of its inertial development, want to encourage the political leadership to accelerate overdue reforms. It is no coincidence that in the draft guidelines of the Central Bank indicates that the formation of the economy "excess of optimism" when relative improvement in the external situation. Its occurrence may reduce the incentives to implement structural reforms. Nevertheless, in the absence of real institutional reforms, the Bank of Russia jointly with the government, drawing on business, can and should do everything possible for the resumption of economic growth. Then the reform process will be easier.

Yury Goland


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