Russia Holds Key Interest Rate Steady at 7.75%


The Bank of Russia left its benchmark one-week repo rate at 7.75 percent on March 22nd, in line with market expectations, saying inflation is holding lower than expected after a VAT increase in January. Also, policymakers said short-term pro-inflationary risks have decreased. The central bank lowered its end-of-year annual inflation forecast in 2019 to 4.7-5.2 percent from 5.0-5.5 percent previously expected, before returning to 4 percent in the first half of 2020.

Excerpts from the Information Notice of Bank of Russia:

Inflation dynamics. In February—March 2019, annual inflation is holding lower than the Bank of Russia’s expectations. In February, annual consumer price growth rate rose to 5.2% (vs 5.0% in January 2019). As of 18 March, annual inflation was 5.3%. The VAT increase pass-through to prices has largely materialised. Its contribution to annual inflation was around 0.6-0.7 pp, which corresponds to the lower bound of the Bank of Russia expectations range. Certain deferred effects of the VAT hike may manifest themselves in the months to come. An accurate assessment of the VAT increase effect on inflation can be made in the second quarter of the current year.

According to the Bank of Russia’s forecast, annual inflation will pass its local peak in March—April 2019. That said, the Bank of Russia has lowered its end-of-year annual inflation forecast in 2019 from 5.0-5.5% to 4.7-5.2%. Quarterly year-on-year consumer price growth is set to decelerate to 4% as early as the second half of 2019. Annual inflation will return to 4% in the first half of 2020 when the effects of ruble’s weakening in 2018 and the VAT rise peter out. 

Economic activity. The economy is close to its potential. Current consumer demand movements and labour market conditions do not generate excessive inflationary pressure. In January—February, annual industrial production growth was the same as in 2018 Q4. Investment activity growth is still moderate. As predicted by the Bank of Russia’s forecast, annual retail sales growth declined in January—February as a result of the VAT increase and a slowdown in wage growth. The Bank of Russia maintains its 2019 GDP growth forecast in the range of 1.2-1.7%. The VAT hike slightly constrains business activity. Newly attracted budgetary funds will be used to boost government spending, including spending on investments, as early as 2019. Subsequent years might see higher economic growth rates as national projects are implemented.

The Bank of Russia maintains its 2019 GDP growth forecast in the range of 1.2-1.7%. The VAT hike slightly constrains business activity. Newly attracted budgetary funds will be used to boost government spending, including spending on investments, as early as 2019. Subsequent years might see higher economic growth rates as national projects are implemented.

Inflation risks. Short-term pro-inflationary risks have abated. With regard to internal conditions, secondary effects of the VAT increase and enhanced growth in prices of certain food products became less of a risk. As for external conditions, the revision of interest rates path by the US Fed and other central banks in advanced economies reduces the risks of persistent capital outflows from emerging markets.

The Bank of Russia leaves mostly unchanged its assessment of risks associated with wage movements, possible changes in consumer behaviour and budget expenditures. These risks remain moderate.

In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in 2019.

Russia Holds Key Interest Rate Steady at 7.75%


Central Bank of the Russian Federation | Agna Gabriel | agna.gabriel@tradingeconomics.com
3/22/2019 11:22:09 AM