Russia Leaves Monetary Policy Unchanged

The Bank of Russia left its benchmark one-week repo rate on hold at 11 percent in September, following a 50bps cut in July, saying the ruble depreciation is having an upward impact on prices.

Excerpts from Information Notice of Bank of Russia:

On 11 September 2015, the Bank of Russia Board of Directors decided to maintain the key rate at 11.0 percent per annum, due to the higher inflation risks amid persistent risks of considerable economy cooling. August saw a serious deterioration in foreign economic conditions. Inflation and inflation expectations were showing a clear upward trend, impacted by the exchange rate dynamics. The depreciated ruble will continue to put pressure on prices in the next few months. However, the relatively tough monetary conditions and slack domestic demand will drag down annual inflation. The annual consumer price growth rate in September 2016 is estimated to be about 7%, reaching 4% in 2017, which will be facilitated by the current monetary policy. The Bank of Russia will subsequently revise its key rate based on the balance between inflation risks and the risks of economy cooling.

Weak investment and consumer activity will cause low demand for imports. Export volumes are expected to grow slightly, against the background of the floating exchange rate. As a result, net exports will be the only positive contributor to the annual output growth. Taking into account Q1 GDP data and the negative changes in external conditions, output is forecast to contract by 3.9-4.4% in 2015.

Going forward, the economic situation will depend on the global energy prices and the economy’s ability to adjust to external shocks. As a baseline scenario, the Bank of Russia considers that the oil price will linger at about $50 for the next three years. In these conditions, a decline in quarterly GDP growth is expected to be more protracted than previously forecast. Weak domestic demand and the relatively tough monetary conditions will trigger annual inflation reduction in 2015-2017. A slowdown in the annual consumer price growth will create prerequisites for further decrease in inflation expectations. In early 2016, annual inflation is expected to slow considerably due to, among other factors, its high base of 2015. The Bank of Russia forecasts the annual consumer price growth to be about 7% in September 2016 and to reach the 4% target in 2017, facilitated by the ongoing monetary policy.

Key sources of inflation risks include a further worsening of external climate, persistently high inflation expectations and the revised planned 2016-2017 rate and price growth in the regulated sector, while social payments will be indexed and the overall budget policy will be eased

Russia Leaves Monetary Policy Unchanged

Central Bank of the Russian Federation | Joana Taborda |
9/11/2015 11:59:00 AM