Bank of Russia Leaves Rates on Hold

At its February 14th, 2014 meeting, the Bank of Russia Board of Directors decided to maintain the benchmark key rate at 5.5 percent, as the inflation is expected to be close to the target level by the end of 2014 amid slow economic growth. But the central bank also noticed that it would raise rates if the weakening rouble causes inflation to rise above mid-term targets.

Excerpt from the statement by the Board of Directors:

Russian economy’s growth rates remain low while industrial output continues to stagnate. Meanwhile, business confidence indices show the lack of improvement in producers’ sentiments. Weak investment activity is caused by the overall economic uncertainty and lower profits in the real sector. Fueled by growth in retail lending and high growth of real wages, consumer demand is still a major driver of economic growth. The aggregate output of goods and services remains somewhat below potential.

In December 2013, the annual growth rate of consumer prices reached 6.5%, surpassing the target range for the specified period. Acceleration of inflation in 2013 Q4 was largely attributed to rise in prices of fruits and vegetables, along with some milk and poultry products. The Bank of Russia estimates the contribution of this factor to the inflation acceleration in 2013 at 0.5 percentage point. In early 2014, the annual growth of consumer prices decelerated and stood at 6.1% as of 10 February 2014.

Factors that led to acceleration of inflation at the end of 2013 are expected to exhaust their influence in the first half of 2014. Amid slow recovery of external demand and weak investment activity, the aggregate output of goods and services will remain below potential. This factor will contribute to a decrease in the consumer price growth rate. Slow growth rates in monetary aggregates formed in 2012 and persisted in 2013 will also contain inflation in 2014. Based on the above specified trends and given the current key rate level, the Bank of Russia expects the downward trend in consumer price growth to continue with inflation rate converging to the target level of 5.0% in late 2014.

A major source of uncertainty for this forecast is inflationary risks related to accelerated price growth at the end of 2013 and observed currency depreciation. If the negative impact of these factors spills over to the prices of a wide range of goods and services and to the household expectations, the possibility of inflation deviating from the mid-term targets will increase. In this case, the Bank of Russia will be ready to tighten its monetary policy.

Bank of Russia Leaves Rates on Hold

Central Bank of the Russian Federation | Joana Taborda |
2/14/2014 10:34:27 AM