Russia's Central Bank Is Meeting On Thursday -- And It Only Has Terrible Options

Elvira NabiullinaREUTERS/Maxim ShemetovRussia’s Central Bank Governor Elvira Nabiullina.

Russia’s central bank is set to meet on Thursday, and it only has bad options.

Here’s a quick overview of the problem facing Russian central bank governor Elvira Nabiullina.

In a note ahead of the report, Nicholas Spiro of Spiro Sovereign Strategy sums up the problem as follows:

“With inflation in Russia veering towards 10%, the central bank — which is now an explicit inflation targeter — has little choice but to raise rates aggressively tomorrow. Yet its clear reluctance to hike rates given the severity of the economic downturn makes it extremely difficult for the central bank to get any meaningful market bang for its policy buck.

The less aggressive [Thursday’s] rate hike is perceived to be, the more markets will question the central bank’s commitment to defending the rouble. Yet the sharper the hike, the greater the concern about the economic sustainability of tighter monetary policy.”

Here is the overview of Russia’s problem in three charts.

Inflation is surging.

But inflation is rising as interest rates have also increased.

Meanwhile, the ruble has lost almost half its value against the dollar in the last year.

And so the problem these three charts presents is this: when inflation rises too fast, central banks raise rates to fight this increase.

Raising interest rates can be thought of as an attempt to make money “more valuable” as higher rates make it more expensive to lend money. Raising rates is also referred to as “tightening” financial conditions.

And so by raising rates, a central bank is working to curb the supply of money as inflation is the result of too much money chasing too few goods.

But since the ruble has been collapsing, Russia’s rate increases aren’t having the desired effect.

Now, the Russian government has been defiant in the face of a declining ruble and an economy that appears headed towards recession in 2015. The official word out of Moscow has been that the declining value of the ruble, the increase in inflation, and the tumbling price of oil is something Russia can overcome.

And maybe so.

But on Thursday, Russia’s central bank only seems to have bad options.

And so here is Russia’s problem: damned if you do, damned if you don’t.

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