The decisions of the Central Bank on the key rate are less predictable compared to the decisions of regulators in other countries, wrote VTB First Deputy Chairman Dmitry Pyanov in a column for RBC. The main reason for this is not unprofessionalism, but the unpredictable macroeconomic environment, and one of the options for solving the problem is extending the time frame for achieving the inflation target of 4%, he believes.
“Seeing from the example of 2023 how often and how significantly the Bank of Russia revises its forecasts within the year, we began to consider the practice of publishing the forecast range of the key rate even harmful: this tool has turned into a “false friend of the analyst.” Whether someone likes it or not, objectively the Central Bank is one of the most unpredictable central banks in the world in terms of monetary policy: this was evidenced by a 2018 IMF study (.pdf), covering the period 2010-2018,” Pyanov noted.
We are talking about the discrepancy between analysts’ forecasts for a decision at a particular meeting compared to the actual decisions of regulators.
Russia remains in the lead (second place after Turkey) according to this criterion in 2021-2023, as follows from VTB calculations. Every significant discrepancy between analysts’ forecasts and the actual decision on the rate leads to an increase in the price of banking products in the future (mortgages not yet taken out, business loans
The current plan to slow down price growth next year to 4-4.5% is difficult to implement – it is “mathematically achievable if inflation falls in the second, third and fourth quarters of 2024 to the level of 2%,” notes Pyanov.
“To achieve it, of course, the regulator must have secret knowledge of what forces are capable of intensifying its attack on inflation. So, there will be another revision of forecasts, or, returning to the comparison of suppressing inflation with the Battle of Waterloo, Wellington has the Prussians as its allies, ready to drive Napoleon to Paris,” writes the deputy chairman of VTB.
The regulator itself does not publish forecasts for specific meetings, but discloses the forecast range of the average value of the key rate for the year. The Central Bank first presented such a forecast in April 2021. Previously, he had resisted such a step for several years due to concerns that markets might perceive the disclosure of this information not as a forecast, but as a commitment to set the rate at this level.
However, we are not talking about the unprofessionalism of the Central Bank, adds Pyanov – it’s all about volatile and unpredictable inflation. Even the daily automated collection of prices for several million standardized goods, which was organized by VTB analysts, has not yet made it possible to achieve more accurate forecasts.
Pyanov describes several options for getting out of the situation.
The first is extending the deadline for returning to the target inflation of 4%. Now the Central Bank expects that inflation will return to 4-4.5% in 2024, and in 2025 it will consolidate at 4%. Some central banks of friendly countries, in particular Armenia, have a public deadline of three years for achieving the inflation target, the banker gives an example.
Another option is to use supply factors as well as demand factors when making a rate decision. For example, the main reason for raising the rate in 2023 was the strengthening of domestic demand, but such a factor at the end of 2022 could have been the overheating of the labor market, which was noticeable even then, Pyanov believes.
The third option is improvement (along with Rosstat) the composition of the basket of goods and services used to calculate inflation. “Add to the calculation goods or services that stabilize inflation, for example, imputed housing rent,” the banker suggests.
How the Central Bank tightened policy
The central bank moved to tighten monetary policy in July and has since doubled its key rate, from 7.5 to 15%. The last meeting of the regulator’s board of directors on this topic in 2023 is scheduled for December 15. Unlike the scenarios of 2014 and 2022, when the Central Bank sharply raised the rate and then gradually reduced it, the new cycle will be established for a “long time,” emphasized Elvira Nabiullina, Chairman of the Bank of Russia.
“Past episodes of significant rate hikes are largely associated with risks to financial stability. When these risks went away, we reduced the rate. This time the situation is different: we raised the key rate due to the realization of inflation risks and will keep it at high levels for quite a long time until we are convinced of the sustainable nature of the slowdown in inflation,” she said.