Russian Central Bank Forecasts End of Recession in Final Quarter

Rapidly falling inflation predicted to lead to easing of monetary conditions and return to growth in final quarter of 2015.

Mon, Jun 8, 2015
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Russia has weathered the storm -- again
Russia has weathered the storm -- again

The Russian Central Bank is now predicting a return to growth in the last quarter of 2015.

It has confirmed that the inflation peak has now passed and that price growth has been stable for several weeks.

Indeed the Central Bank says there is even a possibility that prices may fall in August - a month when inflation is traditionally lower in Russia.

I repeat my view that the situation actually permits the Central Bank to cut interest rates more aggressively than it is doing.  The current very high interest rates together with the fall in real incomes that took place in the first quarter as a result of the inflation spike are the cause of the economic weakness in April and May.

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It is now generally acknowledged that the Central Bank was too slow to raise interest rates in December, contributing to the rouble crash on 16th December 2014.

It now appears to be over compensating by keeping interest rates up for too long.

The Central Bank justifies this policy by the dangers of external shocks - another possible crash in oil prices or (more realistically) more pressure on currencies of emerging market economies (including the rouble) from interest rate hikes in the US.

Regardless of what the justifications for the current policy are, it is clear the Central Bank is determined to stick with it.  

On the assumption that inflation continues to fall, interest rates should anyway start to come down soon, whilst the fall in inflation and interest rates that has already taken place already caused sentiment in the business community to improve in May.

Unless the Central Bank’s fears of external shocks come true, it seems this recession will indeed prove to be short and relatively shallow.

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