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Reduction of key rate by Russia's Central Bank is premature — former finance minister

June 18, 2015, 18:55 UTC+3 ST.PETERSBURG
Former Finance Minister Alexey Kudrin in an interview with TASS said he is confident that for now, the key rate should remain at 12%
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Alexey Kudrin

Alexey Kudrin

© Sergey Savostyanov/TASS

ST.PETERSBURG, June 18. / TASS / The reduction of key rate by Central Bank is premature, said former Finance Minister Alexey Kudrin in an interview with TASS at the St. Petersburg International Economic Forum on Thursday.

"The reduction of the key rate is by the Central Bank is premature, " said he.

"The decline of the key rate leads to the increase of inflation," Kudrin said.

He's confident that for now, the key rate should remain at 12%. "I understand the Central Bank's desire to slightly alleviate the situation on the market, but that always it has a price. Cheap business loans despite the fact that inflation has been close to 16% over the past 12 months, that is of course bold policy," he Kudrin.

Kudrin referred to the international practice, which shows that the rate reduction increases the amount of credit in the economy, increasing the money supply. "Since the main link between money and inflation has yet to be rebutted, the lowering of the key rate leads to either maintaining or increasing of high inflation," Kudrin said.

According to Kudrin, the main factor in inflation is monetary, while the second factor is devaluation and the transfer of high prices unto imported goods. "But if the money inflow of the economy will be lower, then the transfer will accelerate the inflation will quickly disappear," he explained.

On June 15, the Central Bank Board of Directors for the fourth consecutive time reduced the key rate - the weekly repo rate - which determines interest rates for all loans in the economy. The key rate was reduced by 1 percentage point - from 12.5% to 11.5%, according to the bank press release. In total, this year the key rate was reduced by 5.5 percentage points from 17% and has almost returned to the levels of late autumn of 2014. Remaining risks of the economic downturn with smaller inflation risks is the main reason for the Central Bank to reduce the key rate.

According to the Central Bank, after reaching its peak in March, the annual inflation rate dropped to 16.4% in April and 15.8% in May. According to the Central Bank, as of June 8, the annual growth rate of consumer prices was 15.6%.

"The slowdown in the growth of consumer prices was largely due to a decline in consumer demand amid a significant reduction in real incomes, as well as strengthening of the ruble in February and May. In addition, the process of adjusting prices to the established in August, 2014 foreign trade restrictions has finished, and this factor does not provide additional inflationary pressure," the Central Bank said. The Central Bank noted that the dynamics of main macroeconomic indicators in Russia point to further cooling of economic activity. "Although structural factors continue to have a dampening effect on economic growth, the current decline in output is, among other things, of cyclical nature," the press release said.

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