The Bank of Russia decided to reduce the key rate from 11.00 to 10.50% p.a

On 10 June 2016, the Bank of Russia Board of Directors decided to reduce the key rate from 11.00 to 10.50 % p.a. The Board of Directors notes the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy. Slowing inflation allows more certain reliance on sustainable inflation reduction to less than 5% in May 2017 and the 4% target in late 2017, taking into account the decision just made and the retention moderately tight monetary policy. The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory.

In making its key rate decision, the Bank of Russia Board of Directors has proceeded from the following factors.

First. There is more confidence in steadily positive trends in the inflation dynamics. Consumer prices grew less than predicted. The annual inflation has stabilised at 7.3% and the annualised monthly inflation, seasonally adjusted, is about 5%. Economic activity indicators improve along with ongoing low consumer demand and a high rate of savings without creating upward pressure on consumer prices. Inflation expectations of households and businesses continue to decrease. The situation in the global commodity markets was more favourable than expected and contributed to the inflation slowdown through the ruble exchange rate and food price movements (these factors’ influence is temporary and is subject to decrease, which is considered in the inflation forecast). The administered prices and tariffs will be adjusted in July in compliance with the stated plans, but to a lesser extent than a year ago. Consumer price growth rates will keep on going down further, primarily influenced by the demand-side restraints. The Bank of Russia marked down its inflation forecast for the end of 2016, to 5-6%. Considering the decision just made and retaining the current monetary policy stance, the annual inflation will be less than 5% in May 2017 to reach the 4% target in late 2017.

Second. Positive trends in the economy are not accompanied by a higher inflationary pressure. The figures of the GDP dynamics in 2016 Q1 and macroeconomic indicators for April confirm greater sustainability of the Russian economy to oil price fluctuations. Import substitution and non-commodity exports continue to expand and additional growth areas in manufacturing are taking shape. However, the changes in economic dynamics vary across the industries and regions. Investments continue to show a downward trend and a wide range of industries experience stagnation, including those that have traditionally been the sources of growth for the Russian economy. Yet positive shifts in the economy anticipate the beginning of its growth recovery. Quarterly GDP growth is expected no later than 2016 H2. The forecast predicts a GDP increase of 1.3% in 2017 and annual growth rate for output of goods and services remaining low in the following years. The forecast is based on a fairly conservative estimate of the annual average oil price, which is approximately $40 per barrel over the three-year horizon.

Third. Monetary conditions will still be moderately tight, despite a slight easing due to the lowering banking sector liquidity deficit. Real interest rates in the economy (adjusted for inflation expectations) will remain at the level that encourages savings and allows for demand for loans that does not cause an increase in inflationary pressure. In order to ensure operational control over the level and structure of market interest rates in the context of the emerging transition to the banking sector liquidity surplus, the Bank of Russia is ready to take a set of measures designed to mop up liquidity.

Fourth. The risks that inflation will not reach the target of 4% in 2017 declined, but still remain at a heightened level. This primarily stems from inflation expectation inertness, the lack of mid-term budget consolidation strategy and the uncertainty in the parameters of future indexation of wages and pensions. Volatility in the global commodity and financial markets also might have a negative impact on the exchange rate and inflation expectations. The materialisation of these risks might cause a slowdown in the inflation reduction.

The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory.

The Bank of Russia Board of Directors will hold its next rate review meeting on 29 July 2016. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.

Interest rates on the Bank of Russia major operations¹
(% p.a.)

^I Information on interest rates on the Bank of Russia operations is given in the Table ‘Interest rates on the Bank of Russia operations’.

² Floating interest rate linked to the level of the Bank of Russia key rate.

³ Fine-tuning operations.

Information notice ‘On the procedure for conducting fine-tuning operations’.

Information notice ‘On fine-tuning operations to absorb liquidity’

⁴ The Bank of Russia Board of Directors decided to equate from 1 January 2016 the refinancing rate with the Bank of Russia key rate set as of the respective date. Starting from 1 January 2016, the independent value of the refinancing rate will not be set.

Refinancing rate values prior to 01.01.2016

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