Information Notice of Bank of Russia:
Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.
Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.
Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.
According to Bank of Russia estimates, Q3 GDP growth continued in line with the forecast. Farm output increased while mechanical engineering output, freight turnover and the production of durable consumer goods all showed a positive trend. The recovery in consumption is becoming steadier. Consumer demand is shored up by real wage growth driven by inflation slowdown. Unemployment is at a level at which it does not affect inflation.
A number of factors bear the risk of inflation deviating from the target both upwards and downwards. On the short-term horizon, among these factors are food price movements triggered by the supply of farm produce. In the forthcoming months, food price growth will largely depend on crop quality and preservation. Price movements on global commodity markets pose a risk in the medium term if they deviate considerably upwards and downwards from the forecast. The fiscal rule will set off the impact of external economic conditions on inflation and the domestic economic environment as a whole.
Medium-term risks of inflation overshooting the target dominate over the risks of its persistent downward deviation. The main risk sources of inflation overshooting the target in the medium term remain unchanged. First, increasing structural labour shortage may cause labour productivity growth to considerably lag behind wage growth. Second, inflationary pressure may stem from households’ shrinking propensity to save. Third, inflation expectations remain elevated and subject to fluctuations caused by movements in prices of certain goods and services and the exchange rate.
Given the balance of risks for inflation the Bank of Russia’s ongoing transition from moderately tight to neutral monetary policy will be gradual.
Moving forward, the Bank of Russia’s key rate decisions will be based on its assessment on the balance of risks for inflation significantly and persistently deviating in either direction from the target, as well as the dynamics of economic activity against the forecast. The Bank of Russia Board of Directors leaves open the option of further rate reduction at its upcoming meetings.