By Evgenia Pismennaya and Ilya Arkhipov
(Bloomberg) — Top members of President Vladimir Putin’s government are still chafing at the Russian central bank’s decision to raise interest rates last week, according to two people familiar with the matter.
With the Bank of Russia anxious not to repeat its missteps in handling a currency crisis four years ago, the surprise move betrayed signs of panic, said the officials, who requested anonymity to discuss the thinking at the Kremlin and the government.
Another person close to the Kremlin said the rate hike could wait unless the central bank believed an increase was necessary to offset fears of imminent sanctions that risked stoking capital outflow and devaluation pressure on the ruble.
The misgivings reflect the continuing divide at the highest levels of policy making that opened up in the run-up to the central bank’s meeting on Sept. 14. Before the contentious decision, which was forecast by only one of 42 economists surveyed by Bloomberg, the Kremlin’s top economic aide called monetary tightening “highly undesirable.”
The people said the criticism stemming from the government showed concern that the central bank acted pre-emptively out of anxiety born of its experience four years ago. At the time, Putin scolded policy makers for not reacting more quickly to the currency collapse ravaging the economy. Officials also said they suspect top central bankers still suffer a complex over how they handled that experience.
Back then, after a round of sanctions and the crash in oil prices, the Bank of Russia burned through about a fifth of its international reserves to prop up the ruble before allowing it to trade freely later in 2014. After holding borrowing costs unchanged in September 2014, it tried to play catch-up with two rate hikes. But as the crisis snowballed, policy makers ended up having to lift the benchmark by an emergency 6.5 percentage points in December that year.
The rate hike last Friday was the first since that late-night move ultimately halted a run on the ruble. Speaking after the announcement, Governor Elvira Nabiullina explained it as a “quick monetary-policy response” to inflationary risks following a selloff in the ruble.
Asked by Bloomberg at a news briefing if the move was an effort to calm the market after critical comments by government officials put the central bank’s independence in question, Nabiullina said it uses forecasts and analysis to make decisions, in line with its goal of meeting the 4 percent inflation target.
“That in general is what constitutes our independence,” she said.
The central bank didn’t respond to a request for comment.
Policy makers accompanied last week’s rate decision with a sharp increase in their forecasts for price growth, projecting it will surge past the target of 4 percent and reach 5 percent to 5.5 percent by the end of 2019. The central bank also announced it’s extending a pause in foreign-currency purchases for reserves until the end of December to avoid adding to ruble instability.
If discontent about the rate decision has continued to simmer among government officials, nothing has been heard about it in public. On Monday, Finance Minister Anton Siluanov called it an “objective” decision that will help reduce ruble instability.
Three-month volatility, a measure of the future risk investors see for a currency, has since fallen near the lowest in more than a month. The ruble has gained against the dollar during seven of the last nine trading sessions.
But in a sign of continuing discord, the government and the central bank are still sending mixed messages over key issues.
Soon after Siluanov suggested on Thursday that further gains in the ruble could allow policy makers to restart foreign-currency purchases earlier than planned, he was contradicted by Bank of Russia First Deputy Governor Ksenia Yudaeva, who described the pause as a “firm promise” until the end of this year.
They also clashed over the opposing views on inflation, with the finance minister saying it won’t exceed the government’s outlook — which projects price growth far below the central bank’s estimate at end-2019. Yudaeva called the forecast made by the Bank of Russia “the best we could make now” and said the rate increase has contributed to the ruble’s recovery, according to Interfax.
For Vladimir Tikhomirov, chief economist at brokerage BCS Financial Group, an uptick in inflation expectations wasn’t the main motivation for the Bank of Russia, which probably acted because of a concern that continuing capital outflows and declines in the ruble could pose a threat to financial stability. From the point of view of inflation, however, it had a large enough margin on interest rates to wait for longer, according to Tikhomirov.
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