Russia Leaves Monetary Policy Unchanged

At its June 16th, 2014 meeting, Central Bank of Russia left its benchmark one-week repo rate on hold at 7.5 percent, following a 50 bps increase last meeting. Policymakers cited concerns over high inflation and hinted future rate hikes in case existing inflation risks materialize.
Central Bank of the Russian Federation | Joana Taborda | 6/16/2014 10:46:31 AM
Extracts from Information Notice of Bank of Russia: 

In case existing inflation risks materialize, and threats to medium-term inflation targets emerge, the Bank of Russia will continue increasing the key rate. Significant inflation acceleration in February-May 2014 was prompted by a number of unforeseen factors, i.e. the considerable impact of exchange rate dynamics on consumer prices, as well as unfavorable conditions in the markets for some goods. Taking into account that monetary policy influence on the economy is distributed over time, inflation slowing to the 5.0% target in 2014 is unlikely. However, maintaining current monetary policy stance will ensure a slowdown in consumer price inflation to the target levels in the medium term.

The annual rate of consumer price growth is estimated at 7.6% as of 9 June 2014. Core inflation increased to 7.0% in May 2014. The main reason for inflation acceleration is the effect of the observed rouble depreciation on prices of a wide range of goods and services. Moreover, there were a number of specific factors affecting the markets for some food items and boosting their prices. Against this backdrop, household inflation expectations rose, which also had an impact on consumer prices.

So far the rise of the Bank of Russia key rate has had a small effect on bank lending and deposit rates, as well as on volumes of these operations. In March-April lending and rouble deposit rates slightly increased. However, rouble deposit growth rates continued to decline while lending growth rates, in contrast, kept increasing.

According to the Bank of Russia projections, in 2014 economic growth will slow down to 0.4%. Boost to economy from the observed rouble depreciation will be limited. Amid economic uncertainty and declining producer confidence this year there is a high probability of a reduction in fixed capital investment. The combination of slowdown in real wages growth and a decline in household lending growth rates will have a dampening effect on consumer activity. Net exports will make a positive contribution to economic growth. In the second half of 2014, economic growth is expected to accelerate slightly against the backdrop of alleviated geopolitical tension and improving producer sentiment.

Still, the risk of inflation exceeding the target remains high not only in the short term but also in the medium term. That risk is related to rouble exchange rate dynamics affected by, inter alia, monetary policy measures of the foreign central banks and geopolitical situation. Other sources of risk are inflation expectations dynamics, conditions in the food commodities markets as well as a possible revision of planned changes in administered prices. If these risks materialise and it puts medium-term inflation targets under threat, the Bank of Russia will continue increasing the key rate.

Russia Leaves Monetary Policy Unchanged