The Central Bank economist offered a “new view” on the policy of the regulator

Andrey Sinyakov, Deputy Head of the Research and Forecasting Department of the Bank of Russia, proposed to raise the key rate in response to one-time pro-inflationary shocks, regardless of the “anchoring” of inflation expectations – and at the same time almost not to react to one-time price reductions. He writes about this in the article “Incentives to household savings in nominal contracts: the role of inflation targeting” for the journal Economic Policy. The author calls this a “new look” at inflation targeting in Russia.

The purpose of the approach is to protect the ruble savings of Russians from depreciation. The peculiarity of Russian inflation is that strong one-time jumps in prices up are almost not balanced by declines, and the return of inflation to the target does not cancel the already occurred rise in price, Sinyakov points out.

Two or three such jumps at insufficiently high rates may be enough for ruble savings to lose about a third of purchasing power. For example, from sharp price spikes, savings suffered significantly in 2009, 2014-2015 and 2022. Depreciation of savings weakens incentives to save and accelerates inflation expectations, triggering a vicious circle and threatening macroeconomic instability, Sinyakov explains. Therefore, in his opinion, the Central Bank should respond more rigidly to such episodes – that is, adhere to “asymmetric inflation targeting”.

To keep the incentive to save in rubles, the nominal rate in the long term, according to the author, should be at least 8.5% per annum. The article reflects the personal position of the economist, not the official position of the Central Bank. This is emphasized in the regulator itself.

How did the Central Bank respond

The Bank of Russia told RBC that strictly adhere to the principles set out in the “Main directions of monetary policy for 2027-2029”. According to this document, the Central Bank does not react to the deviation of inflation from the target if it is caused by temporary factors and if inflation steadily returns to the target without additional measures. However, the regulator takes into account such factors if they significantly increase inflation expectations. In addition, the Central Bank attaches somewhat greater importance to pro-inflationary risks, since expectations of the population and business remain elevated and react more strongly to the acceleration of price growth than to a slowdown, the representative of the regulator explained.

The policy of the Central Bank is already asymmetric, notes the head of the Center for Macroeconomic Research “Sbera” and chief economist of VEB.RF Alexander Isakov: so, from July 2023 to October 2024, the key rate increased from 7.5 to 21%, and it decreases about twice as slowly. But the regulator attributes the tough response to one-off shocks to unaccompanied expectations, and Sinyakov suggests reacting in this way to protect savings – and continue even after expectations stabilize in the long run. According to Isakov, if you keep the rate 1 percentage point above an extra year, it will cost the economy 0.3-0.5% of GDP on the horizon of two years.

The head of the Central Bank Elvira Nabiullina on November 9 said in the state Duma that high inflation expectations require a tighter monetary policy. “As long as people expect prices to rise at double-digit rates, and that’s what we expect now, rates will be double-digit,” she said.

What asymmetric monetary policy will cost the economy and the budget, whether the key rate needs a lower threshold of 8.5% and what alternatives are offered by the polled economists, read in the subscription of RBC.