Pavel Medvedev: “You will not envy central banks”

With Pavel Medvedev, former adviser to the chairman of the Bank of Russia, deputy of the State Duma of five convocations, now the financial ombudsman of the Association of Russian banks, talking about the problems of monetary policy.

Mihail Voskresenskiy | RIAN
Mihail Voskresenskiy | RIAN

— According to the latest Monetary Policy Report published in October 2021 by the Bank of Russia, earlier the key rate was higher than inflation, in 2020 we saw the opposite picture: the inflation rate exceeds the key rate. What reasons led to such a situation and how could this be avoided?

— This relationship between inflation and the key rate is explained by the fact that inflation grows as fast as it can, and the Central Bank of Russia (CBR), in order not to provoke panic, is forced to act slowly: if there are no obvious threats in the market, it increases the key rate in small steps. As a result, having first lagged behind inflation, CBR would soon certainly catch it up and even overtake it a little. Then the key rate will perform its initial core function; to contain inflation.

How to explain that inflation has acquired such high values? Covid played an important role here. In many countries being economic partners of Russia as well as in Russia itself, payments were made to citizens “just like that,” not for producing any product or service.

On a human scale, this is fair: recipients of money and whether would be happy to produce their usual goods and services, but they were not allowed into production spaces due to quarantine. So, on the market (in markets of different countries) goods and services turned out to be in deficit, but amount of money remained about the same. That is, per unit of goods issued and services rendered amount of money was more than usual, and prices were balanced at a higher level. A market-based mechanism triggered that, while reducing the supply of goods and services, takes care to guarantee that goods and services — ableit in smaller quantities — still go to everyone. In a smaller quantity, so you need to make them less affordable, that is, more expensive. In addition, (trouble came — open the gate!) a crop failure of some food crops in different countries of the world was another factor that triggered.

— Just in October there was inflation at 8.1%, including due to problems with production of agricultural products.

— The job of central banks, in particular the CBR, is unenviable. Epidemics, crop failures, economic crises, natural disasters, arms race, civil and other wars, play against them — and in their hands, essentially, there is a sole weapon – monetary policy, which mainly comes down to the impact on the availability of money for market participants.

— It is worth noting that the Central Bank in its Report on monetary policy for October 2021 indicates a forecast of a rate increase, as well as an average annual key rate in 2022 at the level of 7.3–8.3% in accordance with the baseline scenario.

— This is also an element of the impact of the Central Bank on the market: it avoids shocks. Bank of Russia warns the market that inflation is likely to be constrained by monetary politics, but not as fast as I would like. Such statements increase confidence in the Bank of Russia, and trust is a very important factor in normal economic life. So the central bank in a certain sense has no choice: if you try in a qualified way to evaluate what happens, the CBR does what it should do.

— Let’s talk more about the key rate. December 17th, the next meeting of the Board of Directors of the Bank of Russia will be held, where the decision at the key rate will be discussed. According to today’s situation, is it necessary to raise the key rate? The Bank of Russia predicts that the key rate will be at the level of 7.3–8.3% in 2022. In reality, should we wait for its rise?

— It is very plausible that the rate will be raised on December 17 and will increase several times more in the future. For how much —is another question. I think the final decision for December 17 will be adopted literally the day before, because study of every hour of market dinamics is important for the Central Bank. Times when interest rates changed simultaneously by many tens of percent, have fortunately, passed. The era of jewelry came when the difference between 0.25% and 0.5% is very market sensitive. Jewelry work requires literally all existing information.

— According to Bank of Russia forecasts, the economy as a whole has returned to long-term growth rates in the second quarter; in 2022–2024, a stable GDP growth rate of 2–3% per annum is planned. Is it worth waiting for such changes or can the situation be somewhat more pessimistic?

— Now the economy is growing faster than during the previous decade of 2011–2020 in average.

At that period the average annual GDP growth barely exceeded 0.8%. Now the growth is restorative: includes production facilities that have stopped completely or partially because of covid restrictions return to work. These capacities have not disappeared anywhere, so their use does not require substantial capex and time. After everything returns to work, pre-pandemic economic conditions will be restored; i.e. the conditions when GDP growth — as I just said — is capped at an average of 0.8% per year.

To turn the tide, to reach 2–3% growth, you need to take some steps to the transformation of the economic machinery. At the same time, the steps should be significantly more decisive than those that could be sufficient 10 years ago.

The “green revolution,” which picks up pace rapidly, works against us. It devalues products that make up a substantial part of our economy — hydrocarbons, and thus inhibits GDP growth. If it is true that we Russians are “harnessing slowly, but boom quickly”, now is the time to prove it by quickly and radically improving quality of our economy.

Interviewed by Ekaterina Bazarova

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