Alexander Abramov: "There's every reason for Russian Central Bank to lower interest rate"
The Central Bank of Russia has once again decided to keep interest rate at the level of 10%. Despite positive changes of the inflation and strengthening of the ruble, the interest rate remains at this level since September 19 of the last year. A professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, discussed the reasons of such policy of the Central Bank and what should be expected from the financial regulator in the future in an interview with Vestnik Kavkaza.
- What makes Central Bank keep interest rate at 10% despite decrease in inflation?
- In my opinion, the main reason is an excess in monetary liquidity that has emerged in the banking system due to the fact that the Ministry of Finance spent money from the Reserve Fund. The rate of deposit auctions, due to which this liquidity is being absorbed, is currently almost at the level of the interest rate. The Central Bank simply fears that after the reduction of this rate extra rubles will immediately go to the currency market, and it continues to keep it at the level of 10%.
- Should we expect that the rate will be reduced in the future, for example after achieving the inflation rate of 4%?
- When the Central Bank sets the interest rate it is not guided by actual inflation, but by expected level, in other words, by the inflation rate that will exist in a year according to experts' estimations. Right now there's every reason for the Russian Central Bank to lower interest rate, after all, even expectations are below the level of 10%. The only thing left is to resolve the issue of absorption of excess liquidity in the banking system - and then there will be all conditions to lower the interest rate. So far, in my opinion, Russian Central Bank and the Ministry of Finance don't have clear picture of how to achieve these conditions. They don't know how to make currency market less dangerous.
- What interest rate will be the most effective in the current conditions?
- The rate in which Central Bank believes. Financial regulator must understand how the population and the market participants estimate consumer inflation. To do this, the Public Opinion Fund often carries out polls to measure these expectations. The Bank of Russia just has to decide - believe these polls or not. Right now the expected rate of inflation is around 7-8%, in other words, based on official statistical data, the interest rate should be lower than 10%.
- How comfortable is the current interest rate level for business and banks?
- It is relatively comfortable. Right now financing situation doesn't depend on the interest rate too much. In recent years, the importance of the interst rate as benchmark in lending has somewhat devalued. It's still an important benchmark for banks, and it's the main reason for the fact that portfolio of bank loans for both population and business is not growing. It hinders economic growth. That's what we pay to prevent situation with bank liquidity from getting worse.
- Will future decisions on Russia's interest rate depend on the US Federal Reserve interest rate?
- No one knows when the US will raise their interest rate, but it is still worth noting that these events are unlikely to be related to each other. More likely, the Central Bank will make decisions based on oil prices and other factors, and decisions of the Americans won't significantly affect the behavior of the Central Bank.