The Bank of Russia keeps the key rate at 7.75% per annum

On 26 April 2019, the Bank of Russia Board of Directors decided to keep the key rate at 7.75% per annum. Annual inflation passed the local peak in March and started to subside in April. Consumer prices current growth rates track somewhat below the Bank of Russia forecast. In April, inflation expectations of households rose slightly after a tangible drop in March. Business price expectations continued to decline but remain at an elevated level. Short-term proinflationary risks have abated. The Bank of Russia’s decisions to raise the key rate made in September and December 2018 were sufficient to curb the effects of one-off proinflationary factors. According to the Bank of Russia’s forecast, annual inflation will return to 4% in the first half of 2020.

In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in Q2-Q3 2019.

Inflation dynamics. In March, annual inflation passed the local peak. The annual consumer price growth rate increased to 5.3% in March (from 5.2% in February 2019). In April, annual inflation started to slow down and declined to 5.1%, according to the estimate as of 22 April. Consumer prices current growth rates tend to be somewhat below the Bank of Russia’s forecast. The VAT increase pass-through to prices has largely materialised.

The Bank of Russia’s pre-emptive key rate hikes in September and December 2018 helped return annualised monthly consumer price growth rates to levels close to 4%. Consumer demand trends constrain inflation. Also, temporary disinflationary factors contributed to slowing consumer price growth, among those ruble appreciation since the beginning of the year, and declining prices for principal types of motor fuel and certain food products in March-April compared to February readings.

In April, inflation expectations of households rose slightly after a tangible drop in March. Business price expectations continued to decline but remain at an elevated level.

According to the Bank of Russia’s forecast, annual inflation will return to 4% in the first half of 2020.

Monetary conditions. Monetary conditions have seen no significant changes since the last Board meeting. OFZ yields, as well as deposit and lending rates held close to their March-end readings. That said, the year-to-date decline in OFZ yields creates conditions for the decline of deposit and lending rates in the future.

Economic activity. Rosstat’s revision of 2014-2018 GDP data has not changed the Bank of Russia’s view of the current state of the economy — it is close to the potential. Current consumer demand trends and labour market conditions create no excessive inflationary pressure. In the first quarter, industrial production grew moderately year on year and somewhat below the reading of 2018 Q4. Investment activity remains muted. Annual retail sales growth declined in the first quarter as a result of the VAT increase and the slowdown in wage growth.

The Bank of Russia expects GDP to grow by 1.2-1.7% in 2019. The VAT hike slightly constrained business activity. The incremental budget revenues will be used to raise government spending, including investment, as early as 2019. Subsequent years might see higher economic growth rates as national projects are implemented.

Inflation risks. Short-term proinflationary risks have abated. With respect to internal conditions, the secondary effects of the VAT increase are seen as immaterial and accelerated price growth in certain food products became less of a risk.

That said, significant risks are posed by elevated and unanchored inflation expectations, as well as by external factors. In particular, the risk of a slowdown in global economic growth still looms. Geopolitical factors might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations. Supply-side factors in the oil market may amplify the volatility of global oil prices. At the same time, the revision of the interest rate paths by the US Fed and other central banks in advanced economies in the first quarter constrains the risks of persistent capital outflows from emerging markets.

The Bank of Russia leaves mostly unchanged its assessment of risks associated with wage movements, possible changes in consumer behaviour and budget expenditures. These risks remain moderate.

In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in Q2-Q3 2019.

The Bank of Russia Board of Directors will hold its next rate review meeting on 14 June 2019. The Board decision press release and the medium-term forecast are to be published at 13:30 Moscow time.

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