Yevgeny Nadorshin of Trust bank -

In June, the Central Bank of Russia (CBR) published one of the major documents that sheds some light on the bank's monetary policy – "Guidelines for the Single State Monetary Policy in 2008."

As usual, this document is submitted to the Duma along with the Russian Federation's budget; it contains information on the CBR's strategy, not only with regards to monetary policy, but also about the regulation of the banking system and financial markets. As always, the emphasis is put on monetary policy, but it should be noted that since the document and the budget are considered together, monetary policy is based on the same forecasts used for writing the three-year budget that is currently being considered by the Duma. In particular the document uses the same three scenarios of future development, which were already proposed by the Ministry of Economic Development & Trade - the main difference between the scenarios being the oil price.

Due to this, the guidelines lose a significant share of attractiveness: since the CBR does not present its own viewpoint, its standing in the document is of a formal nature. As such, since the CBR does not actively use the entire range of available monetary instruments, in order to demonstrate that it's feasible to achieve the forecasted low inflation figure it regularly understates the growth rate of foreign currency reserves and, of course, the money supply growth rate. It is obvious that in this situation the necessary sterilization efforts are understated as well. Until now it has led to the fact that targets for inflation, which the monetary authorities are emphasizing more and more, have often not been met.

Monetary policy characteristics

The First point we would like to note is that instead of using one-year forecasts for major stances of monetary policy as in the past, the term has now been changed to three years. A similar situation was already observed last year. Unfortunately, as a year before, it is just a formality. It can easily be seen from the document that the only targets that can be realistically met are those for 2008. Forecasts for the next two years are inertial. Recall that a transfer to a three-year planning system was connected to changes in the budget process. We have already noted that we do not expect revelations from this action: for the authorities it is still just a trial run of new methods in relatively quiet conditions. However, we get the impression that MinFin was a lot more serious than the CBR about forming a three-year plan.

The Second point that catches the eye is the lack of clear intentions by the CBR to support economic growth as part of the current monetary targets. Until 2006, this aim was present in the CBR's strategy in one way or another. In 2008 the key target is only to "gradually decrease inflation to 5-6% by 2010" (9.0% in 2006). Recall that the target is to reduce it to 6-7% in 2008. From economic theory it is known that it is quite difficult to simultaneously decrease inflation and support/stimulate economic growth.

However, earlier the CBR insisted that low inflation provides conditions for long-term growth, which is not confirmed by economic theory. The fact that "creating conditions for long term growth and increasing standards of living" is missing from the strategy, along with dynamically increasing budget expenditures, suggests that the authorities have decided to divide their scopes of activities: the government stimulates growth, while the CBR fights inflation. Another fact speaks in favour of this assertion: neither the government nor many other officials who were criticizing the strengthening rouble in the second half of 2006 are seeing anything bad about it this year. This is understandable - a strengthening rouble does not get in the way of increasing government expenditures.

The Third point that we would like to note is that the the CBR is still not ready to actively use interest rates as a monetary policy tool in the near future. Domestic interest rates are still determined based on the implied yields of non-deliverable forwards, which does not only get in the way of local money market development, but also takes a lot of regulatory opportunities away from the CBR. The regulator's main instrument is still the exchange rate, while the currency market remains its main field of implementation.

We have often criticized the CBR's approach before, considering it to be pretty far away from the best. However, hasty currency liberalization in the middle of 2006 seems to decrease the regulator's freedom of movement.

Yevgeny Nadorshin is chief economist at Moscow's Trust bank

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