Excerpt from the statement by the Board of Directors:
Russian economy continues to slow down. Industrial production is stagnating. Investment activity remains low amid economic uncertainty, declining profits in the real sector and tightened non-price lending conditions. Consumer demand is still the major driver of economic growth. It is supported by still high growth in retail lending. However, a decline in consumer activity is observed against the backdrop of a slower real wages growth and of a deteriorating consumer sentiment. The aggregate output of goods and services remains somewhat below potential.
In February – early March 2014, the year-on-year growth rate of consumer prices rose and reached 6.4% as of 11 March 2014. Inflation acceleration was caused by the dynamics of prices for some food items, in particular, vegetables and fruit, along with dairy products. To some extent the rouble exchange rate dynamics has contributed to consumer price growth. In addition, core inflation did not decline in February 2014.
The inflation rates are unlikely to fall until mid—2014 due to the observed rouble depreciation. Against this backdrop inflation expectations may increase, exerting upward pressure on consumer prices. On the other hand, the reduction in the growth rates of administered prices and tariffs along with the aggregate output of goods and services remaining somewhat below potential would contribute to inflation slowdown in the second half of 2014.
The Bank of Russia estimates that the impact of observed rouble depreciation on economic growth will be limited. Amid increased uncertainty and declining producer and consumer confidence there is a strong probability of a reduction in fixed capital investment along with a further slowdown in consumption. As a result, Russian economic growth will be lower than expected. The noted factors will partially offset the exchange rate pass-through to inflation. Nevertheless, risks of above-target inflation in 2014 remain.
Given the current monetary policy stance, the slowdown in consumer price growth will resume in the second half of 2014. In the medium term inflation will decelerate to the target levels.