Russia Cuts Key Interest Rate To 9%

The Central Bank of Russia has lowered its benchmark one-week repo rate by 25 bps to 9 percent on June 16th, while markets expected a 50 bps rate cut, saying it will continue to conduct a moderately tight monetary policy to maintain inflation close to the 4 percent target. Also, policymakers signaled the possibility of further rate cuts in the second half of 2017, as inflation expectations continue to decline amid a recovery in economic activity.

Information Notice of Bank of Russia:

Annual inflation stood at 4.1% in May keeping close to the target. Low inflation is gradually gaining sustainability. Price growth becomes more homogeneous in regions and for major groups of goods and services. Growth in prices for non-food goods and services continued to decline. Food inflation remains relatively low, although since the supply of last year harvest has become exhausted annual growth in prices for fruit and vegetables is currently rising. Annual inflation registered an expected short-term increase against this backdrop standing at an estimated 4.2% as of 13 June 2017.

As inflation showed a substantial slowdown, inflation expectations of both households and businesses declined considerably. This trend, however, may temporarily come to a halt amid the seasonal rise in prices for certain types of fruit and vegetables, considering that inflation expectations are sensitive to their dynamics. Inflation expectations should be lowered further to anchor inflation close to 4%.

Economic activity continues to recover. Household consumption is on the rise alongside with the growth in investment and industrial output. Currently, a moderate growth in consumer expenditures does not exert any inflationary pressure under increased supply of goods and services.

Considering the current recovery trends, the Bank of Russia has increased its GDP growth rate forecast to 1.3-1.8% in 2017. Economic growth is getting closer to its potential level. The situation in the labour market with the shortage of personnel in certain segments being evident is a constraint. In the sequel a GDP growth rate higher than 1.5-2% annually will be reached if structural reforms take place.

Short-term inflation risks connected with oil price dynamics have declined following the prolongation of the agreement to reduce oil production by oil-exporting countries. At the same time short-term risks arising from the implied harvest, its impact on consumer goods prices and inflation expectations are typical of this season.

Mid-term risks remain elevated. First, they are connected with the further dynamics of oil prices which under reached the agreements began to take shape at a lower level than expected. Legislative consolidation of a budget rule will contribute to mitigating this risk. Second, a higher structural deficit of labour resources can produce a situation when labour productivity growth rates will be left significantly behind the growth in wages. Third, a change in the household behaviour model connected with a substantial decrease in their propensity to save can be a source of inflationary pressure. Fourth, the sensitivity of inflation expectations to price changes for certain groups of goods and services and in the exchange rate dynamics is still present. Fifth, a possible tax manoeuvre can lead to a temporary acceleration in inflation.

Considering these factors the maintenance of moderately tight monetary conditions for a long period of time to anchor inflation close to its target will be required.

The Bank of Russia sees room for cutting the key rate in the second half of 2017. While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.

Central Bank of the Russian Federation | Joana Ferreira |
6/16/2017 10:40:31 AM