Central Bank Keep Money Apart from Inflation
// Monetary Policy
The Central Bank drew up and submitted to the Government the draft of “Guidelines of the Common State Monetary Policy in 2006”, which Kommersant managed to obtain. The draft is to be discussed at the Government’s session on August 18. The Central Bank ducked responsibility for inflation and claimed than neither money supply, nor interest rate has any effect on prices. The only tool left for the national bank is the rise in the ruble rate but its use is limited.
The government staff explained to Kommersant that the Central Bank had officially submitted to them the project on August 11 night. It took one more day to go through bureaucratic procedures like consignment and registration, then the weekend followed, and it was only yesterday that members of the government got a chance to read the document to outline proposals for the cabinet’s session.
The 2006 project slightly differs from the 2005 one (which the government received last November) by its spirit. The previous plan’s section “Purposes and Principles of Monetary Policy” underlined that the main task is to ensure high growth rates in the next decade (the doubling of the GDP), which entails the policy of bringing down inflation. The document said it was necessary to drive the prices growth down to 7.5-8.5 percent, and down to 6.0-7.5 percent in 2006. The paper held it that the short-term interrelation between money aggregates and index of consumer prices had weaken in the recent years, “yet, characteristics of money supply are still an important reference point to evaluate both current monetary conditions and inflation expectations”. Thus, last year’s project was optimistic about bringing down the inflation and the necessity to print rubles in the way that would help this decrease. The document also underscores that “the formation of conditions for the increase of the role of interest rates in carrying out monetary policy”. In other works, the Bank of Russia has not yet turned into the U.S. Reserve System, which beats inflation by raising interest rates, but strives to.
The new project directly points out to the “low efficiency in using the pace of the increase in money supply as an intermediate landmark of the rate of money supply growth” to curb inflation and “the predicted margins of the growth of money supply being not rigid”. So inflation and the printing of money are unrelated: if more money than planned ise printed, nothing bad will happen. It is hard to expect another position given that the annual inflation plan has been fulfilled only once in the recent four years, while, the money supply (i.e., simply the cost of notes in currency) rose 3.5 times, and somebody may suspect a kind of link between the two phenomena. The Central Bank refutes any. The monetary policy it pursues is by any means to blame for the inflation, no matter how much money it prints and how it violates its own emission plans.
It also underlines the fact that “tools of interest rates policy are means of stabilization rather than that of restriction but do not shape the value of money in economy”. Thus, the Central Bank has turned into the American Reserve System to the extent that if money gets too expensive, it may reduce its price. But should money get too cheap, the Bank will unable to make it more expensive. So one cannot blame them for it either, since the bank is unable to beat inflation with interest rates policy. But if deflation starts, one could turn for its help then. Generally speaking, if the inflation plan needs to be fulfilled, we need first of all “adhere to ultimate levels of the change in prices on products and services of natural monopolies since possibilities of the Bank of Russia to bring down inflation by monetary and currency policy are limited given the growth of monopoly and state-regulated prices.” The government will also have to carry out “a number of measures in the budget, the tariff and the structural policies”. The Central Bank can guarantee only the rise in the ruble, if necessary, which curbs the prices growth, the document claims. But it is not almighty here too because we may need to restrict of the strengthening ruble to promote competitive ability of Russian commodities. We should note that, under the project, the Central Bank plans further to switch to the regime of financial targeting [the system whose sole aim is to achieve a fixed inflation level, as in the UK, for example] and in this case they will be in no control of currency rate.
Despite the above-mentioned proof of the Central Bank’s innocence about inflation, the task of combating inflation is still on the agenda. It is proposed to ensure if not 6.0-7.5 percent, then at least 7-8.5 percent next year. The economic growth, the fall in inflation and the rise in money income of the population are expected to further promote the rise in the demand for the national currency. Though this document’s forecast looks a bit exaggerated given the drop in inflation, because it will hardly be lower in 2005 than in 2004. People are usually anxious about the nominal dollar rate in Russia. The project notes that if the price for Urals is down to $28 per barrel, the nominal dollar rate in 2006 will rise, which will make foreign currency accounts more attractive. If the price drops to $40 per barrel, the nominal dollar rate will stay at the same level. If the price for Urals amounts to $50 per barrel, the dollar rate will go down leading to the further de-dollarization of economy.
| Three Money Scenarios of 2006 |
| |
2005 (estimates of the Central Bank) |
2006 |
| Average price per a barrel of Urals ($) |
48 |
28 |
40 |
50 |
| Export ($ bln) |
269.0 |
219.3 |
259.8 |
290.7 |
| Import ($ bln) |
158.2 |
170.4 |
179.5 |
182.3 |
| Net capital exports ($ bln) |
9.5 |
9.5 |
9.5 |
9.5 |
| Rise in gold and foreign currency reserves ($ bln) |
59.4 |
22.8 |
54.5 |
82.5 |
| Cash in currency (rubles, bln)* |
2202 |
2579 |
2622 |
2644 |
*In 2005 – as of January 1, 2006; in 2006 – as of January 1, 2007.
Source: “Guidelines of the Common State Monetary Policy in 2006” project. |
by
Sergey Minaev, Konstantin Smirnov
All the Article in Russian as of Aug. 16, 2005
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