Tulin’s interview hints to rate cut next week

RUSSIA ENERGY / FINANCE - In Brief 06 Mar 2015 by Marcel Salikhov

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Yesterday CBR’s new deputy governor for monetary policy Dmitry Tulin gave his first major interview to Interfax news agency. Mr Tulin tried to explain and defend CBR’s motives for last rate cut. While compared to Ms Yudaeva Mr Tulin communicates in a much more clear way we find his arguments not so convincing. One of the main points of Mr Tulin is that Russian monetary policy is tight because M2 growth rates are lower than nominal GDP growth rates. We think that in current circumstances appealing to M2 growth rates is not reasonable. M2 is just some part of RUB deposits. Decline in M2 growth rates is caused partly by RUB devaluation and to flight to currency. M2X which includes FX deposits soared in recent months (see graph below). At the same time growth rates of M2 became lower that nominal GDP early in 2014 but that didn’t stop policy tightening. We note that CBR’s officials continue not to explicitly refer to FX market situation while explaining interest rate decisions. Official explanation refers just to inflation and interest rates levels. Another observation is that Mr Tulin questioned comparing current inflation rates with key rate value. As monetary authorities target future inflation rates there’s no direct link between past inflation and current rate. While this is true in theory there’s no reasonable indicator of market-wide inflation expectations in Russia. So past inflation is often used as a proxy of future inflation in the spirit of adaptive expectations. Mr Tulin confirmed that CBR’s policy goal is to 4% inflation by 2017% but didn’t give convincing explanations how the goal would be reached. The interview supports the idea that inflation goal de facto...