A bet about two ends. Why the measures of the Central Bank may not work during the war

The Bank of Russia continues to “tighten the nuts” in the hope of supporting the ruble and curbing the acceleration of inflation. At the regular meeting of the regulator’s Board of Directors, it was decided to increase the key rate by another 1 percentage point to 13 percent per annum. Moreover, at the press conference that took place after the announcement of the decision on the rate, the head of the Central Bank, Elvyra Nabiullina, said that in the base scenario, by the end of the year, the key rate will be in the range from 13 to 13.6 percent.

In other words, it will definitely not be reduced, but another increase is quite possible. Moreover, in an official statement, Nabiullina specifically emphasized: “We raised the key rate due to the realization of inflationary risks. And we will keep it at high levels for quite a long time – until we are convinced of the sustainable nature of the slowdown in inflation.”

Elvyra Nabiullina

Elvyra Nabiullina

If you follow the logic of the Central Bank, the accelerating price growth is a consequence of the excess of solvent demand over supply. Simply put, the money that people are willing to spend is now more than the goods they are willing to buy. Russian industry is not able to rapidly increase output and satisfy demand, so the demand for imports is growing. And that means currency. At the same time, the export revenue decreased significantly.

Loans become more expensive not only for end consumers, but also for business

And here is the natural result: the ruble has fallen, imports are becoming more expensive, inflationary expectations are growing. People continue to take out loans, even at the current high interest rates, out of fear that goods will become more expensive tomorrow, and loan rates will rise. Which means that it is necessary to raise rates even more decisively in order to make the purchase on credit inaccessible to a sufficient number of Russians.

The Bank of Russia is deliberately trying to stop the rise in prices, acting precisely from the side of demand. That is, ultimately limiting consumption. However, loans become more expensive not only for end consumers, but also for businesses. By raising the rate, the regulator automatically leaves manufacturers the opportunity to eliminate the imbalance not by reducing the amount of money in the economy, but by saturating the market with consumer goods. And this is also done quite consciously. That is why the Central Bank lowered the upper limit of GDP growth for this hour from 2.5 to 1.5 percent.

However, increasing the production of consumer goods and meeting solvent demand is not the only obstacle to Russian business. Nabiullina also speaks of a more serious limitation: “The growth rate of the economy is limited by the availability of resources, primarily labor. The situation on the labor market is still tense, especially in labor-intensive industries, in particular in metallurgy, mechanical engineering, and the chemical industry.”

So it’s time for Russians to start behaving more modestly, moderate their appetites and learn to live within their means without relying on loans. The Russian economy gives everything it is capable of, but the export revenue is not enough to pay for imports. Hearing all this, of course, is unpleasant, but there is a certain logic in everything. It would be more accurate if it were not for one circumstance that turns all the logical constructions of Nabiullina and her team into useless garbage.

The government advances the production of cartridges, shells, tanks and aircraft

The problem is that, for the second year in a row, the employees of the Central Bank carefully ignore the war and the impact it has on the Russian economy. Meanwhile, this factor can have a significant, if not decisive, impact. The “restorative growth” of the Russian economy, about the completion of which not only Nabiullina, but also Putin, has ensured the military industry, which occupies an increasingly significant share of the Russian economy.

This sector depends to a minimal degree on the cost of loans. The government advances the production of cartridges, shells, tanks, and aircraft, and there is no need to talk about a reduction in budget funding for arms production in the foreseeable future. An increase in the key rate will give the military-industrial complex an additional advantage in competition with civilian production for acutely scarce labor resources.

Russian Defense Minister Sergey Shoigu

Russian Defense Minister Sergey Shoigu

At the same time, from the point of view of saturation of the consumer market with goods, from the supply side, military production is absolutely useless. On the other hand, additional demand is provided by workers of military enterprises, who receive more than competitive salaries, with enviable regularity (the same applies to the fighting “contract workers”, whose number is increasing, and at the expense of the same civilian sector of the economy).

The slowdown of the economy in the current Russian conditions means a reduction in civil production and an even more rapid growth in the share of “defense”. Moreover, the military-industrial sector is the main beneficiary of the “battle for the ruble”. Both exporters and manufacturers of goods aimed at the domestic market only benefited from the devaluation. And the military factories working on advance payment in rubles faced an increase in the cost of importing components and equipment.

The well-being of the Russians is at a peak, it will only get worse in the future (at least until the end of the war).

So that the rate increase can lead to a much more modest reduction in consumer demand than the Central Bank hopes and to a more serious reduction in the number of consumer goods on the market. The general picture of industrial production (due to the military industry) will be good, and prices will continue to rise. Then the Central Bank will continue to raise the rate, and all with the same results. And so in a circle.

But even if this does not happen, the words about the completion of restorative growth can be interpreted exclusively as a statement: the well-being of Russians is at its peak, and it will only get worse in the future (at least until the end of the war).

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