The Central Bank of Russia held its benchmark one-week repo rate at 9 percent on July 28th, as widely expected, saying that short-term and mid-term inflation risks persist and that the decline of inflation expectations has come to a halt. The central bank also reiterated it will continue to conduct a moderately tight monetary policy to maintain inflation close to the 4 percent target and that there is still room for further rate cuts in the second half of 2017.
Information Notice of Bank of Russia:
Inflation remains close to the target. June saw a slight short-term rise in inflation to 4.4%, which came as a result of price movements in fruit and vegetables under the influence of bad weather conditions. At the same time, the trend towards sustainably low inflation remains in place. Growth rates of food product prices, but for fruit and vegetables, continued to slow, so did prices in the non-food product market and core inflation. Price growth rates continue to show consistency both across regions and in the consumer basket. This is reflected in the growing proportion of products and services posting price growth rates around 4%. In this environment, recovering consumer demand alongside the decline of its disinflationary effect brings no material risks. In the months ahead, as new harvest comes in, prices for fruit and vegetables are set to show a seasonal downward trend.
Consistent with expectations, the seasonal rise in prices on individual food products brought about a temporary halt in the decline of household and corporate inflation expectations. Their performance could also have been impacted by the traditional rise in regulated prices and tariffs.
The weakening of the ruble in June and July had no meaningful implications for annual inflation and inflation expectations, given its substantial strengthening observed since early this year. For inflation to become anchored close to the 4% target, sustainable decline in inflation expectations in required.
Monetary conditions are crucial in the efforts to bring about sustainably low inflation. They are adjusting to the key rate reduction. Interest rates on loans have declined but their level supports moderate demand for borrowing. Banks continue to adhere to a conservative policy by mitigating price and non-price lending conditions, primarily for reliable borrowers. The slowdown in the growth of household deposits mainly comes as a result of the declining paces of money supply growth, triggered by fiscal operations, rather than as a result of declining deposit rates. The Bank of Russia will continue to set such monetary conditions which will support the propensity to save and warrant balanced growth in consumption, thereby curbing inflation risks.
The economic activity is rebounding. Positive trends in industrial production are gaining momentum, freight turnover is growing, and construction has turned to recovery. Growth in household consumption expenditures went up along with the increase in investment and production. A moderate increase in consumer spending is not adding inflationary pressure as the supply of goods and services expands. Annual GDP is to grow by 1.3-1.8%.
At the same time, economic growth is nearing its potential level. It is constrained, among other things, by the situation in the labour market where shortages of labour force are already visible in some segments. Further GDP growth above 1.5-2% a year is attainable if structural reforms are put in place.
Short-term inflation risks persist as regards harvest prospects and their impact on food prices and inflation expectations. Furthermore, volatility in global commodity and financial markets, as well as exchange rate dynamics amid elevated geopolitical risks may have negative implications for exchange rate and inflation expectations.