The Central Bank of Russia cut its key interest rate by 50 basis points to 10.00% but stated that there was unlikely to be a further cut before 2017 and then possibly by smaller increments.
Implications | Although the bank acknowledged recent disinflation with a 50 basis-point cut, concerns about risks to the targeted inflation trajectory persist and trump an effort to accelerate an economic recovery by further relaxing the monetary stance in the near term. |
Outlook | The bank's statement made explicit that no further cuts in the key rate will be considered before 2017 and even then it is likely that the rate will come down further only very gradually and slowly, given the priority assigned to achieving the inflation target and thus enhancing the bank's credibility. |
At its regularly scheduled meeting on 16 September, the board of the Central Bank of Russia (CBR) opted to lower its key interest rate, the minimum one-week repo auction rate, by 50 basis points to 10.00%. The rate had stood at 10.50% since mid-June. The press release that accompanied the decision stated that the cut was instituted due to the deceleration of inflation as projected by the CBR and the lowering of inflationary expectations under conditions of constrained economic activity. The CBR calculates that annual consumer price inflation had slipped to 6.6% on 12 September compared with 7.2% at the end of July and 9.8% at the outset of the year. The bank attributes some of that progress to gains by the rouble under a more favorable external economic environment than had been anticipated. Further support for its efforts to bring down inflation rates can be expected from stabilisation of the rouble exchange rate and what is anticipated to be an excellent 2016 harvest. However, the CBR observes that still-significant monthly increases in the average price of non-food goods point to a weakening of the disinflationary influence of insufficient domestic demand and, further, that seasonally adjusted price indices (which would exclude the impact of falling prices of fresh produce typical at this time) continue to register hefty monthly increases. The CBR does feel that with the maintenance of a relatively stringent monetary policy that annual inflation will fall to 4.5% by September 2017 and to 4% by the end of 2017.
The CBR believes that its decision on the key rate and the persistence of a moderately tight monetary policy will reduce inflationary expectations. The statement points out that the current market interest rate structure and the results of recent surveys indicate that market participants are expecting a more rapid decline in the key interest rate than the bank foresees and forecast a higher rate of inflation at end-2017 than the 4.0% targeted by the CBR. Thus, it is deemed necessary to maintain the key rate at the current level for an extended period, one which will both support demand for credit without an inflationary surge and will maintain incentives for household to add to savings. Although the CBR notes that the economy has adapted to new conditions in that import substitution and expansion of exports other than energy has proceeded with some signs of a rebound of production in selected areas of industry, it also believes that the rebound is unevenly distributed both across industries and across regions. Nevertheless, the CBR does not believe that its relatively strict monetary policy is restraining economic recovery but rather that structural problems are at fault.
The CBR maintains that risks to its forecast trajectory for annual inflation are still in play. These include first of all, inertia of inflationary expectations and a potential weakening of incentives for households to save. Moreover, no specifics have been established in regard to fiscal consolidation, including intentions on the indexation of wages and social support payments. Unfavourable developments with respect to world trade and financial markets could affect the rouble and also result in above-target inflation rates. While it is not explicit in the bank's statement, it is clear from this language and the strategy that is being adopted that concerns about these risks and about the persistence of inflationary expectations are going to trump concerns about a very modestly paced and uneven economic recovery.
Outlook and implications
The CBR statement explicitly lays out the intention to maintain the key interest rate at 10.00% at the very least through the end of 2016. If there are clear signs that risks to the targeted trajectory of inflation are receding, the bank may resume lowering its key rate in the course of 2017. However, in a presentation to the press that followed the board meeting, CBR Chairman Elvira Nabiullina indicated that when it did come, the next rate cut could be by as little as 25 basis points. The CBR does foresee that quarter-on-quarter seasonally adjusted GDP growth rates could turn positive in the second half of 2016 but projects that growth in 2017 as a whole will come in at less than 1%. The baseline forecast assumes a world-market price of oil at USD40 per barrel, a relatively slow rate of growth of the global economy and persistent domestic structural economic problems.