I continue to wonder who Bank of Russia President Elvira Nabuillina works for. Seriously. On Friday, in response to solid growth in Russian economic statistics over the past few months, Nabuillina again raised interest rates 0.25%.
She still adheres to idiotic IMF-style ‘inflation targeting’ dogma.
Price inflation in Russia finally got off the roughly 2.5% mat in August steadily rising to 3.8% in November. This prompted Nabuillina to raise rates again, stifling growth which itself was stifled by her overly-cautious rate cutting earlier in the cycle.
The recovery in Russia after the Ruble crisis of 2014/15 was exasperated by her holding interest rates too high for too long. The Russian bond market took way to long to normalize because of this lack of liquidity.
In 2017 and early 2018, every time the Bank of Russia cut rates the Ruble would strengthen, that’s how high demand was for them. The Russian yield curve was approaching normalcy.
And Nabuillina is now, again, undermining it by trying to control price inflation as opposed to letting the market regulate itself.
The short-term Russian bond market is screaming for some relief and the Bank of Russia won’t accomodate. Remember, inflation in Russia is running just 3.8%, so we’re talking a positive real yield on overnight money of 4%. This is not making it easy to liquefy a growing economy. Real yields of 4% on 3 to 5 year money? Ok.
But overnight? I’m all for a cautious central bank that does not inflate massive bubbles but I’m also not for a central bank to do the bidding of a country’s adversaries either by undermining growth with needless austerity.
Central Bank Fallacies
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