In recent weeks, a number of government officials, and even President Vladimir Putin, have voiced their concerns about the current tightness of monetary policy. The CBR has so far resisted this pressure: since its 25bp increase in September, it has kept key rates unchanged, as it did yesterday. This publication of Thoughts of an Economist assesses whether the time is right for the CBR to start the policy easing cycle and, if so, whether and when it is likely to start.
Russia needs monetary easing. I support the view voiced recently by government officials and the president that current monetary policy remains too tight, and that this has resulted in a below-potential economic growth rate. I see the following reasons justifying monetary policy easing: i) economic growth is already below potential; ii) policy mix would become tighter even with an unchanged monetary policy; iii) the aforementioned factors will in our view keep economic growth below potential, and by the middle of the year, we expect to see a negative output gap of some 0.5% of GDP that will continue widening; iv) the headline CPI spike is temporary and the main risk is actually undershooting; and v) monetary policy is better if it is forward-looking.