Monetary Policy of EAEU Member States: Current Status and Coordination Prospects

• Analytical Summary

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Eurasian Development Bank’s Centre for Integration Studies and the Macroeconomic Policy Department of the Eurasian Economic Commission (EEC) conducted a research titled Monetary Policy of EAEU Member States: Current Status and Coordination Prospects. The main objective was to analyse monetary policies in the EAEU countries since the Treaty on the Eurasian Economic Union provides for deeper economic integration, including in the form of coordinated macroeconomic and foreign exchange policies. The report based on the results of the research considers the following issues: the ongoing foreign exchange and monetary policies; the effectiveness of drivers used by regulators to influence the economy; barriers to the efficient coordination of monetary policies within the union; and possible common objectives and tasks solved by central (national) banks.

Foreign exchange and monetary policies in the EAEU countries are very different. This suggests that, to coordinate them, a common policy objective as well as achievement mechanisms will need to be devised.

The main purpose of monetary policies is to achieve and maintain inflation at a low and stable level. In this regard, central (national) banks have made a step towards coordination: the announced mid-term inflation targets have been narrowed to a significant extent. (The average inflation targets in the EAEU member states are as follows: Armenia 4%, Belarus 5%, Kazakhstan 3-4%, Kyrgyzstan 5-7%, and Russia 4%). In addition, most EAEU countries have announced plans to make transition to inflation targeting with a flexible exchange rate; yet, their approaches differ.

The barriers to boosting the efficiency of monetary policies in some EAEU countries include high dollarisation, high and volatile inflation rates, significant inflation and devaluation expectations, weak financial sector, the existence of shadow economies, the economies’ dependence on labour migrants’ remittances, low economic diversification, and dependence on external price shocks. Without solving these problems, it would be difficult to deepen monetary coordination.

One of the conditions for improving the efficiency of monetary policy coordination is to gradually match incomes in poor and rich countries, or ensure convergence between them. The analysis has shown that incomes in the EAEU countries tend to converge, but these processes are not uniform and involve not all members of the union at a time.

One of the first steps to improve the efficiency of monetary policy coordination in the EAEU countries can be the imposition of common price-stability targets. This step seems reasonable for a number of reasons. First, the imposition of common price-stability targets (and, as a result, the maintenance of stable inflation rates) can help to decrease dollarisation. Second, if central (national) banks in the EAEU countries will maintain low inflation rates, interest rates in the EAEU economies will also converge and this will have a positive effect, in particular for smaller EAEU economies.

High dollarisation is a significant problem for monetary coordination in the EAEU. It affects the efficiency of monetary policies and limits governments’ capability to manage macroeconomic indicators. The member states with highly dollarised economies remain significantly exposed to external shocks. Therefore, the improvement of monetary coordination cannot be imagined without low dollarisation and high trust of the economic agents in the national currencies. The best way to improve trust in a national currency is to ensure the stability of its purchasing power, i.e. persistently low inflation backed by a free and moderately volatile exchange rate.