Global ‘Cheap Money’ Stirs Russian Dissent, Call for Caution

  • Bank of Russia governor warns productivity, economies at risk
  • Loose policies perpetuate market volatility, Nabiullina says

Russia’s central bank governor isn’t sure if the unprecedented monetary easing around the world is a killer or a cure for the global economy.

With the world awash in cash thanks to the stimulus programs of central banks from Europe to Japan, investors have poured money into projects that are damaging productivity while doing nothing to ease market volatility, Governor Elvira Nabiullina said in an interview with CNBC broadcast on Friday.

Attempts by major central banks to boost growth with looser policy have propelled stocks since the global financial crisis, and government bond yields have fallen to record lows. Hours before the U.S. Federal Reserve scaled back its tightening plans Wednesday, Japan tweaked its stimulus program, fueling bets that Europe will keep its easing stance.

“The era of cheap money has indeed led to the kind of situation where financing and investment were put into projects with low productivity, which all things being equal and under tougher monetary conditions would not have been financed,” Nabiullina said. “But at the same time, because of the continued easing of monetary policy in many countries, there is also the possibility that a higher level of financial-market volatility will persist.”

Nabiullina, described by Morgan Stanley as the “most orthodox” central banker in developing Europe, called for her counterparts around the world to follow a predictable, cautious strategy that doesn’t rock the boat. The Bank of Russia did its part last week by issuing an unprecedented commitment to leave interest rates unchanged the rest of the year after a cut on Friday, only its second in more than a year.

Productivity Hurdle

Low productivity has been among the top challenges to central bankers in advanced economies, alongside slow inflation and weak levels of investment.

Fed Vice Chairman Stanley Fischer has said that restrained growth in workers’ output per hour, caused by factors including an aging labor force and weak corporate investment, is “the problem” keeping U.S. economic gains near 2 percent. A former Bank of Japan official, Tsutomu Watanabe, said last month that the Asian nation’s monetary authority should stop its record bond purchases and shift its focus to targeting increases in wages and productivity as well as inflation at 2 percent.

Chair Janet Yellen has described the Fed’s policy as “only modestly accommodative,” partly because slow productivity growth and an aging workforce have reduced the economy’s potential pace of expansion and thus its long-run equilibrium interest rate.

Weak global growth has undermined demand for Russia’s main exports, forcing its central bank to seek a policy that will boost labor productivity, according to Nabiullina. Russia is at at the tail end of its longest recession during President Vladimir Putin’s rule after the crash in energy prices undermined the country’s biggest export.

Policy makers lowered their benchmark rate to 10 percent from 10.5 percent on Sept. 16 and vowed to keep it at that level until the end of the year even as the bank cut its forecast for 2017 economic growth. Its stance aims to encourage higher savings and channel them into investment while pushing companies to streamline their businesses instead of counting on price increases.

As policy decisions from two of the world’s most influential central banks loomed in recent days, the wait spurred a spike in market volatility over the prior two weeks. Investors withdrew $369.4 million from the biggest exchange-traded fund invested in developing-nation debt in the five days through Sept. 16 as uncertainty about the future path of U.S. monetary policy fueled market fluctuations.

“It’s very important that there aren’t any surprises because the response from the markets could be very sensitive,” Nabiullina said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE