Russia Lowers Key Rate to 12.5%

The Bank of Russia cut its benchmark one-week repo rate by a bigger-than-expected 150bps to 12.5 percent in April. It is the third straight cut as inflationary pressures slowed while the economy is cooling.
Central Bank of the Russian Federation | Joana Taborda | 4/30/2015 11:42:56 AM
Excerpts from Information Notice of Bank of Russia: 

On 30 April 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 14.00 to 12.50 percent per annum, taking account of lower inflation risks and persistent risks of considerable economy cooling. Amid ruble appreciation and significant contraction in consumer demand in February-April 2015, monthly consumer price growth declines and annual inflation tends to stabilise. According to the Bank of Russia forecast, consumer price growth will slow down faster than expected. Annual inflation will fall to less than 8% in a year (April 2016 on April 2015) and to the target of 4% in 2017. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.

The dynamics of the major macroeconomic indicators show a considerable GDP contraction in 2015 Q1. Though structural factors continue hampering the economic growth, output contraction is currently mostly of cyclical nature. It is attested, among other things, by the on-going decline in production capacity and labour force utilisation, and a certain rise in the unemployment rate. According to Bank of Russia estimates, the labour market adjusts to the new conditions mostly through wage decrease and part-time employment. These factors, alongside with a decrease in retail lending, will result in further decline in consumer activity. Fixed capital investments will continue to contract due to persistently high economic uncertainty, deterioration of companies’ financial performance, tighter lending conditions, limited ability to replace foreign sources of funding with domestic ones given shallow Russian financial market, as well as high prices for imported investment goods. Sluggish domestic demand will contain imports. Net exports will be the only factor to make a positive contribution to the output growth. These factors will lead to a fall in GDP in 2015. Later on, as import substitution expands, sources of funding gradually diversify, lending conditions ease, and oil prices rise to some extent, the quarter-on-quarter GDP growth is expected to recover.

Thus, the current economic conditions will contribute to inflation decline. The ruble appreciation will have additional restraining influence on consumer prices. Inflation, both monthly and annual, is expected to gradually decline. A slowdown in consumer price growth will make room for inflation expectations decrease. According to the Bank of Russia forecast, annual inflation will slow down to less than 8% in a year and to the target of 4% in 2017.

Inflation risks emanate primarily from persistently high inflation expectations, aggravation of external economic situation, revision of planned increases in administered prices and tariffs, fiscal policy easing, and accelerated growth in nominal wages, including those in the public sector. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.

Russia Lowers Key Rate to 12.5%