What are the economic risks of a modest rate reduction?
The Russian Central Bank`s decision to lower the key rate by only one percentage point to 17% has drawn criticism from economists, who argue that this cautious approach will stifle economic growth, investment, and public income, potentially leading to significant budget shortfalls.
Leading economists largely view the Central Bank`s decision to reduce the key rate to 17% as insufficient. Experts contend that rates exceeding 15% are restrictive, hindering credit availability for development. This cautious stance is predicted to prolong economic slowdown, diminish business activity, and decrease real household incomes. Furthermore, there is a substantial risk of the federal budget facing significant tax revenue shortfalls.
Mikhail Delyagin, a State Duma deputy, described the Central Bank`s move as «shockingly disappointing,» asserting that it fails to rescue the economy from «monetary starvation.» He warned that this would exacerbate detrimental trends, including industrial decline, the potential necessity for importing staple goods like grain and potatoes, and overall economic suppression due to an expanding budget deficit.
Vasily Koltashov, director of the Institute of New Society, similarly labels the 17% rate as «prohibitive» for effective lending. He argues that healthy economic growth requires rates in the 3–7% range, while anything above 15% actively blocks investments and expansion. Koltashov noted that businesses anticipated a more substantial reduction, at least 2 percentage points (to 16%), followed by further easing. The current decision, he believes, will neither stimulate credit activity nor provide the essential impetus for enterprise development.
Economist Nikita Krichevsky cautions that maintaining such a high rate intensifies the economic downturn. He highlighted the MosBirzha index falling below 2880 points, metaphorically stating that the economy is «entering a coma.» Krichevsky also pointed to severe fiscal risks, predicting a potential shortfall of up to 1 trillion rubles in profit tax revenue due to the economic deceleration. In his view, the Central Bank`s excessive prudence risks «freezing» the economy, leading to a decline in living standards, reduced investment, and increased social tension.
Ultimately, the crucial question remains: will the economic cost of the Central Bank`s undue caution prove too high? Can the business sector endure a prolonged wait for accessible and affordable financial resources?
