Place your bets: Does Russia need inflation targeting?

At the end of the 19th century, Swedish economist Knut Wicksell was one of the first in the world to come to the conclusion that high or, conversely, too low inflation can be regulated by the Central Bank. To do this, it needs to raise the interest (discount) rate when consumer prices grow faster than necessary, and reduce it if prices fall too much.

The interest rate, according to many world-famous economists such as John Maynard Keynes or John Hicks, balances savings and investments in the economy. This means that when rates are high, it is more profitable to save, and when rates are low, it is more profitable to invest. However, in practice, this concept of the role of interest rates and their management by central banks began to be applied only at the end of the 20th century.

Before that, financial regulators used only individual monetary policy tools. For example, they could raise interest rates to limit lending to risky projects. In the early and mid-20th century, the recovery from economic crises, whether the Great Depression in the United States or the post-war recession in Europe, was primarily the task of governments.

Central banks began to take a more active part in regulating national economies in the 1970s. The heads of the world's leading national banks began holding annual symposiums to discuss the situation in the global economy and their participation in regulating it. Since 1981, the most famous of these summits has been held in Jackson Hole, Wyoming, USA. Conspiracy theorists call it a meeting of the "deep state" or even "world government." But even without any conspiracy theory, it can be said that the heads of the world's central banks come to this forum in the American hinterland to listen to the speech of the head of the US Federal Reserve System and take his experience on board.

In the 1980s, Forbes wrote, the Fed "was very lax in its use of interest rates for regulation." At the beginning of this decade, inflation in the United States accelerated sharply due to rising world oil prices. The Fed, trying to contain inflation, raised interest rates to a historic record of 20%. Later, a recession began in the United States, and due to the prohibitive level of rates, many businesses and banks found themselves on the verge of bankruptcy. Tight monetary policy helped contain inflation, but the Fed, under the leadership of Paul Volcker, was harshly criticized by then-President Ronald Reagan and his administration, who literally demanded that the rate be lowered to support economic growth.

Monetary policy in its modern sense appeared in the early 1990s, when the Reserve Bank of New Zealand and then the Bank of Canada took as a benchmark the optimal inflation rate for developed countries, according to the International Monetary Fund, of 2% per year. If prices grow at such a rate, it promotes the development of production and does not allow the population to become poor. For developing countries, the IMF considers inflation of 4% per year to be normal. In New Zealand and Canada, and later in the UK, which applied this experience, inflation targeting proved successful. Price growth of 2% per year suited both consumers and producers. The Federal Reserve System adheres to the same course of monetary policy. Since the 1990s, its average key rate has been 5.4%, that is, the regulator has no need to raise it to the prohibitive levels of the early 1980s.

The global financial crisis of 2007–2009, triggered by the bankruptcy of a number of large banks and mortgage agencies in the United States, was overcome by the Federal Reserve System by reducing the federal funds rate to 0–0.25%. A quantitative easing (QE) program was adopted, under which the regulator bought government bonds and debt obligations of problem banks and mortgage agencies from commercial banks in order to pump the economy with monetary liquidity and thereby stimulate the growth of consumption and business activity. As a result, after the American economy declined by 3% in 2009, in 2010 the US GDP rose by 2.7%. From 2014 to 2023, the Federal Reserve System repeatedly used easing or tightening of monetary conditions to support economic growth and contain inflation.

Since the 1990s, developing countries have responded unevenly and unevenly to the innovations of developed-country central banks in inflation targeting. In Southeast Asia, only Malaysia followed this course during the 1997–98 crisis, sharply raising interest rates to curb inflation. Other crisis-hit countries in the region chose to rely on IMF loans and slow price growth through currency interventions. In South Korea, so much of its gold and foreign exchange reserves were spent stabilizing the national currency (the won) that major corporations asked their employees to surrender jewelry and other items made of real gold to the state. The People’s Bank of China had long shied away from inflation targeting, but when the country, which had previously suffered from deflation, faced a sharp price hike after the pandemic, the local regulator adopted the practice. For a time, even interest rates on loans to highly reliable borrowers were raised.

In Turkey, Western methods of regulating inflation have repeatedly met with sharp criticism from President Recep Tayyip Erdogan. In 2024, inflation in the country exceeded 60%, securing its place among the world leaders in this indicator. In 2025, the regulator began to reduce interest rates, seeking to slow inflation to 24% per year, that is, moving to its targeting.

The Central Bank of Russia's inflation target is 4% per year. The methods the regulator uses to achieve it often draw criticism, since consumer price growth is limited by historically record interest rates. Let us recall that in the fall of 2024, the Central Bank of the Russian Federation raised the key rate to 21% per annum and only began to reduce it in June 2025. Critics of the Russian Central Bank's course like to recall that in the 2000s, inflation was significantly higher than today's 9% per annum, and economic growth in the country averaged at least 8%. Thus, the authorities did not try to restrain price growth, and the economy developed much faster than in the past few years. Indeed, the key rate (previously, the Central Bank used the refinancing rate, which did not imply inflation targeting) has been in effect in Russia since 2013, when Elvira Nabiullina took over as head of the Central Bank. However, since no targeted monetary policy had been conducted in the Russian Federation up to this point, we can recall what the consequences of the economic crisis of the late 2000s were for Russia. In 2009, Russian GDP fell by the highest since the beginning of the century - 9%. The reason for this was the lack of targeted stimulation of economic growth. The exit from the crisis was ensured solely by very high prices for oil and gas. The manufacturing industry and many other sectors of the Russian economy were in a state of chronic underinvestment, so it is not surprising that due to global shocks (then without any sanctions or restrictive measures) many industries simply collapsed like a house of cards. This situation became a warning signal that the economy cannot be left to its own devices: government support is needed, including through affordable lending.

In our opinion, the optimal monetary policy in Russia, as probably in other countries of the world, could correspond to the principle expressed in the saying: "Money should not lie idle" (authored by the great military leader Alexander Suvorov). This means that the optimal interest rate should, on the one hand, allow those who intend to invest money in their own business to earn money, and on the other hand, not interfere with those who prefer to keep funds on deposit in a reliable bank or in bonds with a good interest rate from receiving a good income. Simply put, the rate should be neither too high nor too low. This is precisely the meaning that the most outstanding economists in the world have spoken about, implying an equilibrium level of the economy that balances production growth, employment and inflation. That is, inflation targeting, of course, makes economic sense if it threatens to become uncontrollable. However, in our opinion, the end in itself of monetary policy should be people and their well-being. The optimal level of the key rate of the Central Bank of the Russian Federation could be the range of 9-12% per annum. That is, the regulator still has room for its further reduction.

Published in the newspaper "Moskovsky Komsomolets" No. 29585 of August 15, 2025

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