One of the first things I read this morning was this Itar-Tass statement of Putin’s latest pronouncement:
A gradual inflation slowdown will allow the Central Bank to reduce its rate of refinancing, Prime Minister Vladimir Putin said.
“We can expect the Central Bank to reduce the rate of refinancing,” Putin said at an economic meeting.
Central Bank Chairman Sergei Ignatyev agreed with him.
At the same time, Putin said, “This issue is within the exclusive jurisdiction of the Central Bank Board of Directors.”
“The government should create conditions under which the reduction of the base rates will not be just a symbolic step but will effectively make loans less expensive,” Putin said.
Of course it is in the exclusive jurisdiction of the RCB Board. Putin said “Jump!” and the Board said “How high, boss?” So, after I got into the office this morning, and had a chance to catch up on the news, I read this:
The first in a series of interest rate cuts and a minister acknowledged recession could strike much deeper than the government has previously forecast.
Some 1.8 million Russians have lost their jobs in the first three months of the year in a recession that raises the risk of social unrest and presents a major challenge for Russia’s rulers after years of fast growth fuelled by oil wealth.
The 50 basis point cut to key rates, an attempt to support the economy through its deepest crisis in a decade by making commercial loans cheaper, was in line with expectations.
But it came slightly sooner than forecast — most analysts polled by Reuters on Wednesday said the move would come in early May.
The rationale? Inflation is coming down. Really!:
“We believe that we are in a downward trend on inflation and that gives us the basis for lowering interest rates,” the central bank’s first deputy chief Alexei Ulyukayev told Reuters.
“If the macroeconomic situation is favourable, we will continue (to cut rates),” he added.
Sure! The world famous economist Vladimir Vladimirovich Putin says so:
Just a day after Prime Minister Vladimir Putin said slowing inflation could allow rate cuts, the central bank said it would lower the key refinancing rate to 12.5 percent from 13.0 percent from April 24, and cut the minimum one-day repo rate to 9.5 percent from 10.0. [ID:nLM493897]
After the announcement, deputy economy minister Andrei Klepach said the Russian economy likely shrank a much sharper than expected 9.5 percent in the first quarter and the International Monetary Fund’s forecast for a 2009 Russian GDP contraction of 6 percent was “quite realistic”.
What is the evidence for the slowing inflation? Certainly not the first quarter of 2009. Inflation has actually ticked up, and reached almost 50 percent of the government’s forecast for the year in only 3 months. The story is, apparently, that the leveling of the ruble will reduce import inflation. But, (a) the level of the ruble is not unrelated to monetary policy, and monetary loosening and reducing interest rates will put downward pressure on the ruble, and (b) the dire budgetary situation will also put pressure on the ruble.
This last concern is particularly acute in the aftermath of the travesty of Putin’s appearing to order the rate cut, and a craven Central Bank reacting immediately to comply. Monetary policy is all about credibility, and political independence. I’ve written–as have many other economists, including Hamilton, Meltzer, and others–that the Fed’s actions in the US have raised serious questions about its independence and credibility, and that these could lay the foundation for self-fulfilling inflationary expectations.
The appearance of politicization of Russian monetary policy is now deeply impressed on anybody paying attention. As this quote from the Reuter’s article states:
Rory McFarquhar, senior economist at Goldman Sachs, noted the proximity of the rate cut to Wednesday’s comments from Putin on inflation. “An unfortunate episode, dispelling any semblance of central bank independence,” he wrote in a research note.
“In the past, the central bank has resisted pressure from Putin on exchange rate policy, but rarely has the ‘jawboning’ been quite as direct as yesterday.”
It is interesting to note that this happy talk about easing inflation also is in direct contradiction with the leader of the expert counsel advising the government on the economic crisis, Vladimir Mau. He identifies inflation as Russia’s main economic problem. This suggests a considerable difference of opinion within the Russian government.
So why the haste? Why the political pressure? I detect a sense of desperation. And just why would that be? Well, maybe this has something to do with it:
The economy plunged by 9.5 percent in the first three months of 2009 and might contract by 6 percent this year, Deputy Economic Development Minister Andrei Klepach said Thursday, painting a bleaker picture than the government had previously forecast.
The Economic Development Ministry is now reconsidering its forecast of a 2.2 percent drop in gross domestic product for 2009, Klepach said, calling a recent International Monetary Fund forecast of 6 percent “quite realistic,” Interfax reported.
Klepach declined to give any exact figures.
Just weeks earlier, Klepach and other government officials had criticized as “overly pessimistic” a World Bank report that predicted GDP would fall by 4.5 percent this year.
Klepach got into trouble with Prime Minister Vladimir Putin in December for saying the economy would go into its first recession in a decade. Putin said economic growth would continue in 2009, and Klepach later retracted his statement.
The Economic Development Ministry had predicted earlier this month that the economy would shrink by 7 percent to 8 percent in the first quarter, but Klepach said Thursday that the figure had in fact hit 9.5 percent.
Klepach said risks for the economy were “higher than expected” because lending and construction had not revived as quickly as the government had hoped.
“We forecast that lending will grow by 7 to 8 percent, down from the previously expected 10 to 13 percent,” Klepach said.
He said his ministry has raised its forecast for the average price of oil by $4 to $45 per barrel for 2009 but does not see inflation slowing down from the expected 13 percent for the year.
Note further evidence of disagreement: contra Putin and RCB, the Economic Development Ministry does NOT see inflation abating.
Who you gonna believe? Putin or your lyin’ eyes? Putin says inflation is declining. The Central Bank head says Russia is on a downward inflationary trend. But the most recent data say no such thing. And many in the government apparently say nothing of the kind either. This further suggests that the CB move is the result of a political power play engineered by Putin, rather than of a serious consideration of the actual data.
I note as well that this growth forecast from the Russian government is already more pessimistic than the IMF forecast which was more pessimistic than OECD which was more pessimistic than the World Bank, all of which were more pessimistic than previous forecasts. Need I go on?
But maybe not pessimistic enough:
The economy in the second quarter, however, is still expected to fall by 8.7 percent to 10 percent, Klepach said.
Some market players suggested that Klepach’s figure remained too optimistic.
“The data voiced by the deputy minister show that the economic fall in January was not the bottom,” Rye, Man and Gor Securities said in a research note. “The revival of the economy will not be possible without a significant change in interest rates.”
Want further signs of desperation? What about the decision to cease reporting of monthly unemployment statistics, apparently because the news is extremely alarming?:
According to Reuters’ calculations, unemployment hit 11.9 percent in March from 8.5 percent in February, assuming that previous data was unrevised.
“The shift [in jobless data reporting] could imply a huge leap in March that Rosstat [the State Statistics Service] is seeking to smooth over with this new reporting method,” said Rory MacFarquhar, an economist with Goldman Sachs.
Russia’s vast reserve fund, intended as a cushion against economic downturns, will be completely spent next year as the country battles the crisis, Finance Minister Alexei Kudrin said on Wednesday, Russian website NewsRu.com reports.
“We believe that the reserve fund next year will be practically fully spent,” Russian news agencies quoted Kudrin as saying.
Not vast enough, apparently.
Against this barrage of bad news–virtually all of it from Russian, and Russian government, sources, I might add, not the surmises of stateside professors–desperation is understandable. Very understandable. Exploding unemployment. An apparently hopeless budgetary situation. An economy that continues to contract far more dramatically than other large economies, which are themselves contracting more rapidly than since the 1930s. Under these circumstances, it is completely understandable that Putin would be more than willing to trample Central Bank independence underfoot, and demand monetary easing. Sure, inflation may wreak havoc in the future, but Putin–always a man in a hurry–is focused on the very dire present.
Indeed, to me Putin’s action in crossing a line that he has avoided heretofore, is a very credible signal of his desperation. When you got nothing, you got nothing to lose.