It won't be possible to cope with rising prices by raising the key rate alone
Inflation, inflation, inflation… In recent months, the problem has been on everyone's lips. And it's clear why: firstly, this topic remains very sensitive for people, because prices are rising. Secondly, the constant rise in prices cannot but worry officials, because official inflation forecasts are far from reality.
And what a stir there was about the meeting of the Board of Directors of the Bank of Russia on July 26, 2024… To be honest, I don’t remember when the next decision of the Bank of Russia on raising the key rate was so impatiently awaited. By the way, this decision was made: the key rate was raised immediately from 16% to 18%. The key rate is, let me remind you, the rate at which commercial banks borrow money from the Central Bank. Essentially, this is an indicator that determines the price of money in the economy.
Why does the Central Bank hope that by raising the rate it will be possible to curb inflation? Because — and this follows from the explanations of the head of the Central Bank Elvira Nabiullina — raising the key rate should reduce aggregate demand (both consumer and investment). If this can be achieved, then the declining demand puts pressure on prices. People, in theory, should buy less, and in this case prices should at least slow down their growth, and perhaps even begin to decline.
But this is, so to speak, in theory. Why is it different in practice? Why in our reality prices are only accelerating in their growth? Because the Bank of Russia cannot yet reduce effective demand. And it is impossible to do so due to the fact that the Russian economy is actively pumped with money today, which, on the contrary, stimulates demand, simultaneously ensuring positive economic dynamics.
This is the macroeconomic basis for the inflation that is accelerating today, which by the beginning of August 2024 had reached a cumulative total of 5% since the beginning of the year. I would like to note that the government's inflation forecast for the entire 2024 was 4.5%. It turns out that in 7 months, inflation has already exceeded the level that it should have reached by the end of 12 months. We are, so to speak, well ahead of plan. As a result, if we manage to keep inflation within a single-digit figure (less than 10%) by the end of the year, this can already be considered an achievement.
In the meantime, the Bank of Russia was forced to significantly adjust its inflation forecast for 2024 — to 6.5–7%. Recognizing that inflation is significantly higher than forecast, the Bank of Russia simultaneously declared its readiness to further tighten monetary policy. So it raised the key rate, immediately making it clear that this may not be the last time, since achieving the inflation target (4%) requires “significantly tighter monetary conditions than previously assumed.”
Unfortunately, we must admit: the tightening of monetary policy has not yet produced the expected effect, inflation is not decreasing. The Bank of Russia is doing what it can, using the tools at its disposal. First of all, it is raising the rate, but this, as reality shows, has not yet produced the desired result.
No, there is, of course, some result from the increase in the key rate by the Bank of Russia. Otherwise, inflation would have been even higher. As evidence, we can cite one of the consequences of the increase in the key rate by the Central Bank. Following such increases, interest rates on deposits in commercial banks are growing. In recent months, they have been even higher than the key rate of the Central Bank. It was possible to put money on deposit at 18% per annum, although the key rate was still 16%. That is, commercial banks borrowed money from the Central Bank at 16%, and were ready to do so from the population at 18% or more.
That's why people willingly take their money to banks at such a high interest rate. They don't spend it, but put it on deposit. This is the impact of the key rate on the decline in consumer demand and inflation. But, alas, this impact is clearly insufficient.
So what to do? Let's assume that while the economy is supported by large-scale monetary stimulus, increased inflationary pressure will persist. Simply put, inflation will remain relatively high. In any case, much higher than the coveted 4% per year that the Central Bank sets as a target.
In such a situation, regulatory authorities should at least be much more careful in making decisions that can further spin the price flywheel. Thus, the indexation of tariffs of natural monopolies should be more moderate. In August of this year, people will already pay higher rates for utilities, since from July 1, 2024, the single payment for housing and communal services increased by an average of 9.8% in the country. The growth of utility tariffs for the population continues to be a very painful topic.
We must refrain from increasing import duties on consumer goods. It is clear that there are interests of domestic manufacturers. However, these interests existed before, but the problem of inflation getting out of control was not so acute. Here we need to set priorities correctly. And today the priority is to counter inflation by all means.
It is necessary to avoid increasing the amounts of various fees, duties, etc. It is clear that there are objective reasons for such an increase. But, I repeat, the priority today is not to do anything that will further increase inflation. For example, already in the fall of this year, the amount of the recycling fee for cars may be significantly increased (the indexation of such a fee may be up to 85%). It is clear that this indexation will be included in the prices of cars, which will sharply increase in price as a result. And do not think that this will only affect imported cars. In fact, following foreign cars, domestic cars will also become more expensive. In my opinion, it is quite possible to avoid increasing this recycling fee. And if it is absolutely impossible, then at least to reduce the amount of indexation, to postpone it to a later date — this is certainly possible.
However, a natural question arises: if we refuse to index tariffs, do not increase other payments regulated by the state, then someone should compensate for all this? «Someone» today is the state. Especially. A new tax scale has been adopted — the necessary funds must be found.
Finally, let's not forget about such a reserve for slowing down rising prices as competition. If the market is competitive, if there are many producers and sellers, then prices do not grow so quickly. Because if there are competitors, then the fight for the buyer can be won by offering higher quality products with new consumer characteristics or by offering goods at lower prices. Since the products are often comparable in quality, then you can bypass the competitor only by offering a cheaper product.
This is how it should work and how it works in a competitive market economy. If there are no competitors, if there are only a few, then there is no incentive to reduce prices for their products. Business operates on the principle of «they'll take it anyway, they have no choice.» And they take it (and where else can they go!?), and prices continue to rise. This is a normal competitive market — the field of activity of antimonopoly authorities (and not only). And in this work, there is no need to focus only on the federal level, regional and local markets are also very important.
The above-mentioned areas of work to reduce price pressure indicate not only that the corresponding reserves still exist. This also shows that it is impossible to rely only on raising the Central Bank's key rate in the fight against inflation. In general, such an instrument as the key rate works well in an institutionally developed market economy. In Russia, the economy is clearly not like that yet (let's take the same low competition). This means that we should not overestimate the effectiveness of raising or lowering the key rate, moving it back and forth. Otherwise, it seems oh so simple: move the rate up, and prices go down. Alas, this does not work very well, as the Russian reality of recent months has shown.
This means that we need to work in other areas as well. And the Central Bank should not take on all the responsibility for the rise in prices. Not in order to avoid it, but in order to make the work of containing inflation more effective.
And finally. Many people are sure that inflation can be easily dealt with: simply prohibit price increases. This approach is attractive, to be sure. But we must realize that we have already been through all this. When prices are simply frozen, goods «for some reason» begin to disappear. This is the choice we have: either prices rise, but there are goods, or they do not rise, but a shortage of goods sets in. Therefore, there are no simple solutions here. But it would also be wrong to meekly agree with inflation accelerating at such a rate.