The Central Bank of the Russian Federation maintained its key rate at 7.25% as it revised upwards its inflation forecast ahead of a planned value added tax hike in 2019.
"Taking into account the impact of the suggested fiscal measures on inflation and inflation expectations, the transition to neutral monetary policy needs to be slower," the central bank said. "Keeping somewhat tight monetary conditions allows to limit the scale of secondary effects arising from the tax policy decisions and stabilize annual inflation close to 4%."
The central bank now forecasts annual inflation at 3.5% to 4% in late 2018, picking up to 4% to 4.5% in 2019, then moderating to 4% in early 2020. Planned tax revisions will contribute about 1 percentage point to inflation, potentially having a partial effect in 2018, according to the bank's estimates.
The ruble slipped 0.19% against the dollar as of 7:11 a.m. ET, and has fallen 9% year-to-date.
The Bank of Russia maintained its 2018 annual GDP growth forecast at 1.5% to 2%, in line with the potential economic growth rate, and expects growth in 2019 and 2020 to "stay close to the said figure." However, the forecast might be revised to reflect the impact of approved fiscal measures on economic performance, the bank said.
If the fiscal measures are successful, medium-term economic growth could overshoot the central bank's forecast, the bank added.