Russia Keeps Key Rate at 11%

The Bank of Russia left its benchmark one-week repo rate unchanged at 11 percent on December 11th, 2015, recognizing growing inflation risks while the risks of economic cooling remained. However, policymakers signaled rate cuts in the next meetings, if inflation slows down in line with forecasts and on condition inflation risks recede.
Central Bank of the Russian Federation | Yekaterina Guchshina | 12/11/2015 10:53:07 AM
Excerpts from Information Notice of Bank of Russia:

The current trends are expected to persist in the coming months. The modest growth of household income and retail lending will continue to contain consumer spending. Investment activity will remain weak amid the persisting economic uncertainty and the relatively tough lending conditions. Investment demand is expected to be constrained also by limited potential substitution of external finance with domestic one, following the narrow nature of the Russian financial market and high debt load of companies. Investment is likely to be supported somewhat by the governmental turnaround programme. In an unfavourable environment in the global commodity markets, exports in value terms are expected to go down. At the same time a weaker internal demand will cause a more significant decrease in imports in value terms. As a result, net exports will be a positive contributor to the annual output growth.

Further economic development will depend on the pace of the economy’s adjustment to the recent external shocks. According to the Bank of Russia’s forecast, gradual easing of internal financial conditions, lower debt burden and improved business sentiment in 2016 H2 will pave the way for investment and production recovery in 2017. It will consequently result in growing household income contributing to the revival of consumer demand in 2018. The GDP fall will slow to 0.5-1.0% in 2016. In 2017, the economic growth rate will stand at 0.0-1.0%.

The annual inflation will drop in early 2016 following its high value in early 2015, among other things. The external trade restrictions imposed against Turkey from January 2016 will not have a significant impact on consumer prices. These restrictions are estimated to add about 0.2-0.4 pp to inflation till the end of 2015 and in early 2016. The slack domestic demand and the relatively tough monetary conditions will drag down annual inflation in 2016-2017. A slowdown in the consumer price growth will create prerequisites for decrease in inflation expectations. According to the Bank of Russia’s forecast, the annual consumer price growth will stand at about 6% in late 2016, on track to reach the 4% target in 2017, facilitated by the current monetary policy.

The key sources of inflation risks are possible further worsening of the external climate against the backdrop of persistently low oil prices, monetary policy normalisation by key central banks and continued slowdown in the Chinese economic growth. Besides, inflation reduction can be hampered by persistently high inflation expectations, and an upward revision, planned for 2016-2017, of rates and prices in the regulated sector, an upward revision of social payments indexation, as well as overall budget policy easing.

Russia Keeps Key Rate at 11%