Six weeks ago, I ran this headline: Russia: A Depression Draweth Nigh. The central bank of Russia had just hiked the interest rate to 17%.
There was no question in my mind what would happen next. Now the economic blind men who make decisions at the Russian central bank have belatedly figured out that my scenario was correct. They have dropped the rate to 15%.
This small a decrease won’t work. The Russian economy is still heading into the tank. The Ruble is already in the tank. It will not get out.
Are these people stupid? Yes. Keynesianism makes people stupid. Cornelius Van Til put it this way: “No matter how much you sharpen a saw that is set at the wrong angle, it won’t cut straight.”
Russia’s central bank is set to admit it made a mistake in hiking interest rates by 6.5 percentage points last month by slashing them.
Bank of Russia raised the country’s benchmark rate to 17pc on December 15, just days after raising it to 10.5pc, in a bid to stop a full-blown currency crisis.
However, the move has failed to curb rises in the euro and dollar, and has been met with anger by consumers and businesses after interest rates on bank loans soared.
The move has also failed to curb inflation, which jumped from 8.9pc at the end of November to 11.4pc at the end of December. Economy Minister Alexei Ulyukayev said on Wednesday that he sees inflation reaching 13pc at the end of this month, or slightly higher.
In a statement, Elvira Nabiullina, governor of the Bank of Russia, said: “The board of directors of the Bank of Russia will take a decision on the key rate primarily based on the need to curb inflation, which in the current environment is a priority issue for people and for business.
“The Bank of Russia will be ready to cut its key interest rate if there is a stable downward trend in inflation and inflation expectations, which are currently still high.”
Members of the central bank, which has also said it will no longer use credit ratings from Standard & Poor’s, Fitch, or Moody’s after two of them downgraded the country’s debt, are scheduled to meet on January 30 and again on March 15.
Russian newspaper Izvestia reported that the central bank is looking at cutting interest rates by two or three percentage points.
An unnamed source who took part in December’s National Financial Council (NFC) – a group of 12 members representing the Russian government and central bank – told Izvestia: “Representatives of the regulator explained [the rate cut] by noting that the increase in the rate did not bring the expected result. It was intended to curb the rise in the dollar and the euro, but that did not happen. The reaction from the population and businesses was really negative.
“The central bank basically admitted that it made a mistake during the last NFC meeting in 2014.”
It will happen here, too, and for the same reason. When a central bank inflates, it creates a boom. When it stops inflating, the boom turns into a bust. Ludwig von Mises showed why in 1912: The Theory of Money and Credit. He was right. All those clever people in central banks who have ignored him have created endless booms and busts. This will not stop for as long as there are central banks.
Get used to it.