The Bank of Russia refuted the opinion that a high key rate accelerates inflation

Mikhail Ershov, Principal Director on Financial Studies, Head of the Financial Analysis Department at the Institute for Energy and Finance, commented on the relationship between the key rate increase and inflation for the Stolypin Club (Digest of Economic News).

The Bank of Russia has published a research paper "Interest expenses of Russian companies". The study refutes the thesis of the Bank's opponents that a high key rate accelerates inflation.

Ershov comments:

The Bank of Russia as a whole does not deny that an increase in the rate leads to an increase in the price level: "with the current level of interest rates on loans, an increase of 1 percentage point may lead to an increase in the price level in the economy by 0.26 percentage points." That is, the connection obviously exists.

It is not only price dynamics that are important for consumer demand. But their absolute level is also important. After all, if the scale of prices has already reached high values, this can slow down demand and, as a result, economic growth. Although inflation itself will be low.

In general, it should be remembered that prices in the economy are falling extremely hard. And they grow easily and quickly. Maintaining high rates for a long period of time will lead to an increase in the price level in the country. Then it will be very difficult to reduce prices, and as a result, the gap between supply and demand will increase even more. This question is already very relevant.

Therefore, an increase in rates aimed at solving current problems simultaneously forms a long-term systemic problem. Lowering interest rates after long-term high values will not return prices to their original low state. And this means that our economy will live in conditions of a higher price level with all the consequences that follow from this.

In addition, it is necessary to understand how to operate such an important monetary lever as the rate when inflation contains a large proportion of the non-monetary component. It would be interesting to know the Bank's estimates of the composition of inflation in terms of monetary and non-monetary parts. This will allow you to apply the necessary levers more precisely, without creating problems for other areas. It is important to operate with more subtle tools, because otherwise high rates can crush not only inflation, but also economic growth.