Russia Holds Key Rate at 11%

The Bank of Russia kept its benchmark one-week repo rate unchanged at 11% on April 29th, saying inflation is easing although at a slower pace than anticipated due to budget uncertainties and ambiguity in nominal wages. Policymakers also said a rate cut could be considered in next meetings if inflationary risks decrease.
Central Bank of the Russian Federation | Yekaterina Guchshina | 4/29/2016 12:15:21 PM
Information Notice of Bank of Russia:

Inflation fell perceptibly; however, the trend bears risks of instability. Slower consumer price growth is triggered by weak demand and gradually descending inflation expectations, driven by, inter alia, the moderately tight monetary policy. Meanwhile, the factors, which are likely to have a temporary impact, have also made a considerable contribution to inflation reduction. They include the Government’s decisions on indexation of wages, pensions, administrated prices and tariffs, as well as a drop in global food prices.

Under the Bank of Russia estimates, the annual consumer price growth rate is down to 7.3% as of 25 April 2016 / as of 25 April 2016 remained at the level of March 2016 of 7.3%. This is in line with the inflation forecast for the year ahead, which the Bank of Russia published in its April 2015 press release (below 8%). In mid-2016, the annual consumer price growth is likely to accelerate temporarily owing to the low-base effect of the previous year. However, further on inflation will continue to go down. The Bank of Russia predicts, consistent with the decision, the annual inflation to stand at about 5% in April 2017, to reach the 4% target in late 2017.

Key macroeconomic indicators show higher resistance of the Russian economy to fluctuations in oil prices. The floating exchange rate partially sets off the negative impact of external shocks. The development of import substitution and expansion of non-commodity exports make a positive contribution to industrial production dynamics. Capacity utilisation indicators have improved. The on-going shifts in the economy anticipate the beginning of its recovery growth. Quarterly GDP growth is expected to reach positive territory in 2016 H2 — early 2017.

Interest rates in the economy are set to decline further even with the key rate unchanged. This is mainly driven by the planned Reserve Fund spending to finance the budget deficit and the ensuing changeover in the banking sector to a liquidity surplus.

There remain elevated inflation risks. These primarily stem from slowly declining inflation expectations against the inflation target, mixed data on movements being observed in nominal wages, uncertainty in parameters of further wages and pensions indexation, and from the absence of mid-term budget consolidation strategy. Due to the continued supply glut in the oil market, the risks of crude prices dropping and their negative pressure on exchange rate and inflation expectations remain high enough.

Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings.

Russia Holds Key Rate at 11%