Loose monetary policy amid inflation and devaluation expectations can lead to cycle of currency depreciation - CBR
MOSCOW. Oct 11 (Interfax) - Interest rates that are not commensurate with the level of inflation and devaluation expectations in a country can lead to "self-sustaining" depreciation of the national currency like in Turkey, Central Bank of Russia (CBR) deputy governor Alexei Zabotkin said.
"Demand should not be a factor that curbs production, of course, but demand should also not become a source of constant inflationary pressure. And the self-sustaining weakening of the exchange rate can become one of the means and flywheels of such constant excess inflationary pressure," Zabotkin said at a meeting of the State Duma Financial Market Committee.
"This is when the weakening of the ruble increases devaluation expectations and interest rates on the national currency are insufficient to offset these concerns of citizens and companies," he said.
In such a situation, household savings and companies' available cash flow into foreign currencies and assets, which further weakens the national currency, he said.
"How this happens can be clearly seen with the Turkish lira in the past few years. The Turkish authorities have still not managed to break this devaluationary trend despite many measures...In the years of both very loose macroeconomic policy in general and interest rates that were far lower than actual inflation, this flywheel of devaluation expectations started to spin so fast that now it is very difficult to stop," Zabotkin said.
The self-sustaining weakening of any currency is the result of interest rates not corresponding to the level of inflation and devaluation expectations, he said.
Asked if interest rates in Russia are sufficient to avoid this risk, Zabotkin said "[w]e will assess this at the upcoming meeting."
The forex market and the exchange rate are affected by household and corporate money moving from rubles into foreign assets, not by where this money and these assets are located, he said.
"If inflation and devaluation expectations are growing, then a higher interest rate is needed to stop this spiraling of savings being converted to foreign currency and self-sustaining devaluation," Zabotkin said.
The ruble's exchange rate has been very volatile for months and this reflects that "fluctuations in external conditions are taking place to which the rate is responding," he said. In general, the exchange rate is being influenced by declining exports and rapidly growing imports driven by domestic demand, Zabotkin said.
"Our export capabilities have decreased significantly. So far they are not expanding much. This is affected by sanctions, and our voluntary export restrictions regarding some items, and the slowdown of global economic activity," he said.
Meanwhile, there is rapid expansion of ruble demand for imports, directly driven by the growth of domestic demand. "Even with unchanged, much less declining, exports such a comparative dynamic leads to the weakening of the exchange rate," Zabotkin said.
"We therefore believe that the weakening of the ruble in recent months should be seen not as an independent, autonomous factor in the intensification of inflation, as happens, for example, when there is a steep drop in global commodity prices, but as an important and to a large extent leading indicator of the increased sustained demand and inflationary pressure in the economy. And our objective is to make sure that the growth of domestic demand corresponds to production capabilities in the economy and its import capabilities, which are determined by exports," Zabotkin said.