Information Notice of Bank of Russia:
Inflation. Annual inflation continues to decline in line with the Bank of Russia’s forecast. This is partially attributed to temporary factors — the ruble exchange rate and last year’s heavy crop. December saw a further slowdown in growth of prices for staple goods and services, as well as lower monthly inflation (seasonally adjusted). Domestic demand continues to exert a disinflationary effect. Households are retaining their savings behaviour model, although their sentiment improved. Consumer lending bears no inflation risks. The Bank of Russia’s forecast suggests that given today’s decision and extension of moderately tight monetary policy, annual inflation is to slow down to the 4% target by late 2017 and hold close to this level in the sequel.
Monetary conditions. In order to maintain the propensity to save and anchor sustainable inflation slowdown driven by demand-side restrictions, monetary conditions should remain moderately tight. They should also help bring inflation expectations of households and businesses further down. Positive real interest rates will be held at the level which will ensure demand for loans without increasing inflationary pressure and uphold incentives for saving.
Economic activity. Economic recovery in 2016 was somewhat above the Bank of Russia’s expectations, as the average annual oil price was close to the baseline scenario assumptions. The Bank of Russia estimates that quarterly GDP growth rates entered positive territory in the second half of 2016, with the positive trend set to hold into the first quarter of the current year. Growth in industrial production (partially driven by import substitution) is ongoing, and so is expansion of non-oil and gas exports in several categories; investment activity is gradually perking up. The labour market is adjusting to the new economic environment, with signs beginning to emerge that skilled labour shortages are finding their way in individual segments. The Bank of Russia’s estimates signal that the observed annual rise in real wages will foster gradual growth in consumer activity. It will come without additional proinflationary pressure amid a rise in supply of goods and services. Annual GDP is expected to show positive growth in 2017; however, the rates of economic growth will be low. It takes structural improvements and time for the positive trends to advance and become sustainable.
Inflation risks. Risks remain that inflation will be above the target level of 4% in 2017; inflation risks are abating on a mid-term horizon. The inertia of inflation expectations and households’ shrinking propensity to save may prevent inflation from consolidating on the path towards the target as the effect of temporary factors comes to an end. External political and economic uncertainty remains elevated, which may negatively affect expectations as regards exchange rate and inflation. Maintenance of moderately tight monetary conditions will constrain inflation risks, including the short-term ones, coming from the launch of purchase of foreign currency in the FX market. The application of the transitional budget rule, accompanied with purchases/sales of foreign currency will help lower the dependence of the Russian economy, particularly in terms of monetary conditions and inflation dynamics, on fluctuating oil prices. In the medium term, the application of the budget rule will help bring about macroeconomic stability and more predictable and steadier interest rates in the economy.