Boris Kheifets: Key bid in 2023 can still grow

The Central Bank of the Russian Federation sharply raised the key rate from 8.5% to 12%, making a reservation that in the event of continuing inflation risks, this high threshold may be revised too. Invest-Foresight talked with professor of the Financial University under the Government of the Russian Federation Boris Heifetz and found out how much and for how long the rate increase can weaken inflation. We also asked the professor about methods of combating inflation over a long-term horizon and positive and negative effects of high rates on domestic economy.

– Such a major rate increase is really capable of holding inflation from a sharp upward jump? For a long time?

– I want to say that the situation that we are currently experiencing is impossible to compare with something else. Although, let me remind you, there were very serious shocks – in the 90s, the crisis and default of 1998…

– Who turned 25 this August…

– Yes, who turned 25 years old. And in 2008 they used completely unusual methods of stopping the situation. As for the sharp raising the key rate, then I think this is one of the measures that in principle, of course, will have some impact. But it seems to me that this impact will mostly be psychological in nature.

This is a tried and tested measure. Let me remind you that in February-March 2022 the Central Bank also raised the rate and the set of measures as a whole gave a positive effect. But at this rate increase was accompanied, and even more so, by measures limiting the outflow of capital, by the mandatory sale of foreign exchange earnings, and by other limitations.

All this then had an effect, and as a result, half a year followed with quite good and favorable economic development.

– But the capital outflow was also observed, and quite a serious one…

– Yes, capital outflow still amounted to a huge amount of 217 billions. The final amounts are generally quite difficult to take into account, because now a number of other factors play in favor of this process, including weakening of foreign exchange policy, permission to leave part of foreign exchange earnings abroad, which is associated with sanctions problems – to secure payments.

– That is, the effect of raising the key rate is still really more psychological?

– Yes, if some other measures were taken (although the Central Bank stopped buying currency, and part of the foreign exchange earnings was made obligatory to sell), but since these measures are single, not systemic – they did not play such a calming role. Although the ruble exchange rate still fell, albeit not much.

Another secondary reason is the increase in imports. On this, the ruble exchange rate can also decrease slightly, balance of payments indicators will improve.

– What other measures are needed to contain the situation?

– I think that other measures will also be taken. Remember that first restrictions have been introduced – it was possible to exchange-output money in the amount of $10 thousand.

Plus, some foreign companies were allowed to convert part of the amounts from the sale of their assets into currency and withdraw it from the country.

A very important problem is the reduction in foreign exchange earnings. It is estimated to reach one third, but the oil price ceiling, in my opinion, on the contrary, contributed to the growth of its volumes, which remain abroad.

– And what are the ways to combat inflation to apply in our situation?

– The main measure is an increase in production, and investment. Import too would help reduce inflation, but today it is impossible in such volumes, as before. And production cannot increase so much, as interest on loans increased. And this is a real problem, since the geopolitical situation remains difficult.

– High interest at the key rate – for whom they are good and for whom they are bad?

– Good for the budget. Because the enterprises, I assume, will still borrow money. And bad for the population that is credited, and takes mortgage loans.

When compared with the West, by the way, there is also a tendency to increasing rates. While for a long time they came out of the 2008 crisis just by quantitative easing, printing money, and everybody was printing – the European Union, China, USA, and Japan, where deposit rates even were negative.

Now rates are growing everywhere. Although, by the way, in the same United States they believe that the increase of rates just knocked down inflation, because they also had very high percentages.

– Do you think the rate will still rise this year? What are the limits?

– I don’t even know what to say. It seems to me that the key rate of the Central Bank will still grow this year, slightly, but it will grow. And on this high level, as now, it will also last. At the same time, much depends on how the geopolitical situation develops.

As for the limits, in the world, we remember, in the 70s and 80s of the last century, rates reached 20-25%. But we understand that a high rate is, in fact, an additional tax on the population, which could cause an increase in social tensions. And this is a very serious destabilizing factor, especially in conditions when the last years have seen an increase in social differentiation, both regional, and economic one in general.

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