With little progress on bringing down inflation to date and the prospect of higher food prices, the bank opted to hold its key interest rate at 11.00%.
IHS perspective | |
Significance | The Central Bank of Russia once again withstood the pressure to lower interest rates in order to preserve a cautious stance. |
Implications | The board of the bank believes at this time that the risks on the side of inflation are more immediate than a further downside to the real economy. |
Outlook | The bank will wait for signs that inflation is coming down before acting again, but given the likely impact of the base effect as 2016 proceeds, the anticipation is that the cut will come in one of the next several board meetings. |
At its regularly scheduled meeting on 11 December, the board of the Central Bank of Russia (CBR) opted to hold its key interest rate at 11.00%. While that rate had peaked at 17.00% almost a year earlier, it had come down to 11.00% by the July meeting but has since been on hold. Despite the pressure from government and business leaders to bring down interest rates in order to stimulate the sagging economy, the board has maintained that it can only do so once it sees the inflation rate clearly on a trajectory to achieve its target of 4% by 2017. The CBR estimates that on 7 December the year-on-year (y/y) rate of consumer price inflation stood at 14.8%, down from 15.6% at the end of October and further that excluding seasonal factors, the monthly rate of increase in the consumer price index has subsided from 0.9% in August through October to 0.7% in November. The easing of inflationary pressure in November is attributed to a successful harvest, the tapering off of the impact of the slide of the rouble in the third quarter and weak consumer demand in the face of slow growth in nominal incomes. Nevertheless, the board deems that the deceleration of inflation is proceeding more slowly than had been forecast while inflationary expectations in November strengthened although they had been expected to wane. The press release on the rate decision states that there are a number of factors that are acting to dampen the increase in consumer prices, including slow growth in the stock of money and conditions which have resulted in a reduced rate of growth of domestic credit. While interest rates on deposits and credits have been declining, the rate of decline has slowed and, together with the existing heavy burdens of debt and tightened requirements for borrowers on the part of banks, this has served to dampen the growth of bank credits.
The CBR is counting on significant disinflation in 2016
Looking forward, the CBR believes that annual inflation will come down significantly in 2016, including as a result of the sharp rate of increase in consumer prices in the year-earlier period. Addressing the newly instituted embargo on imports of a variety of food products from Turkey, instituted as retaliation for the downing of a Russian fighter jet that allegedly violated Turkish airspace, the bank does not believe it will have a substantial impact on the inflation rate. The CBR sees the impact limited to 0.2-0.4 percentage points in the early months of 2016. The anticipated slowing of inflation should dampen inflationary expectations and the bank sees the annual rate of inflation falling to 6% by the end of 2016 and 4% by the end of 2017. However, the board acknowledges that inflationary risks remain. Primary in this consideration is the potential for an extended period of low oil prices on the world market as well as the impact on world financial markets of the upward adjustment of interest rates by major central banks and a protracted slowdown of the Chinese economy. Domestically the risks arise from potential for continued strong inflationary expectations, the adjustment of regulated prices planned for 2016-17, the indexation of wages and loosening fiscal policy.
Economic downturn is judged to be slowing, but recovery is not in sight
The CBR deems that the contraction of Russian economic activity is slowing but without any sign yet that a recovery is taking shape. The press release points out that the high-frequency indicators published by RosStat for October exhibited diverging trends. While the numbers for industrial output and investment seemed to show some improvement, the downturn in retail trade turnover accelerated. While the unemployment rate remained low, the bank sees the labour market adjusting by means of the decline in real wages and an increase in part-time employment. The CBR does anticipate that in the second half of 2016 the preconditions for a rebound in investment and production will be in place thanks to easing of domestic financial conditions, ongoing deleveraging and improved business sentiment which will eventually translate into increases in real incomes and hence a recovery of private consumption. The bank's latest forecast sees the contraction of GDP in 2016 slowing to 0.5-1.0% and growth returning in 2017, but at no more than a pace of 1% that year.
Outlook and implications
The CBR is maintaining its cautious approach to loosening monetary policy with an eye to some signals that the inflation rate is not yet on the trajectory to its end-2017 target that had earlier been envisioned. Nevertheless, barring further shocks, and given volatile geopolitical tensions and a far from promising outlook for oil prices and hence the exchange rate is a rather strong assumption, disinflation is definitely in the cards for the first half of 2016 if only due to the statistical base effect and this should carry over to the trend in inflationary expectations as well. Thus, the CBR is safe in announcing that it plans to resume cutting interest rates in the next few upcoming meetings of its board. On the other hand, CBR Chairman Elvira Nabiullina has made it known that she and the bank board deem that there is little that the monetary authorities can do at the current juncture to stimulate the economy given serious structural problems that it faces. The CBR board is scheduled to meet next on 29 January.