Russia Holds Policy Rate at 7.25%

The Bank of Russia held its benchmark one-week repo rate at 7.25 percent on June 15th, as widely expected, after revising the inflation forecast upwards due to a planned increase of the value added tax in 2019. Policymakers now expect annual inflation to be 3.5-4 percent in late 2018 and increase for a short-term period to 4-4.5 percent in 2019, before returning to 4 percent in early 2020.

Excerpts from the Information Notice of Bank of Russia:

Annual inflation in general corresponds to the Bank of Russia’s expectations. In April and May, the annual consumer price growth rate remained at the March level totalling 2.4%.

Inflation for main consumer basket product groups showed mixed dynamics. On the one hand, amid growing global oil prices coupled with the increase in excises early this year, the prices of oil products in the domestic market saw a tangible rise. This factor was the key contributor to the growth of annual inflation for non-food goods up to 3.4% in May (vs 2.7% in April). The adopted decision to lower the excises for oil products from 1 June 2018 will help to slow down the price growth for this product group by the end of this year. On the other hand, fruit and vegetable prices saw a substantial decline, which led to the drop in annual food inflation to 0.4% in May (vs 1.1% in April). This is related to continuing high supply of food products.

Inflation expectations of households and businesses saw a slight increase, which is primarily related to higher petrol prices. The weakening of ruble exchange rate in April moderately affects the dynamics of inflation and inflation expectations. In the coming months, prices will continue to adapt to the established level of the exchange rate and prices of oil products.

According to the Bank of Russia estimates, planned tax revisions will make about a 1 percentage point contribution to inflation. Partially this effect may take place this year.

The Bank of Russia forecasts annual inflation to be 3.5–4% in late 2018 and increase for a short-term period to 4–4.5% in 2019. The consumer price growth rate will return to 4% in early 2020.

2018 Q1 annual GDP growth was slightly below the March forecast, totalling 1.3%. This resulted from a slower than expected growth of fixed capital investment, including a decline in construction, together with the review of the data for 2017 by Rosstat. April saw improved investment and industrial activity, confirming the temporary nature of slower economic growth in March 2018. In view of this, the Bank of Russia kept unchanged its 2018 annual GDP growth forecast of 1.5–2%, which is in line with the potential economic growth rate. In 2019–2020, economic growth will stay close to the said figure. The Bank of Russia’s forecast might be further updated to reflect a detailed estimate of influence that the set of fiscal measures, announced on 14 June 2018, will have on economic performance. Although in the medium term if the scheduled measures are successfully implemented the expected economic growth could be faster compared to the Bank of Russia’s baseline forecast.

Russia Holds Policy Rate at 7.25%

Central Bank of the Russian Federation | Joana Ferreira |
6/15/2018 10:42:20 AM