The Bank of Russia cuts its key rate by 25 bp to 8.25% p.a.

On 27 October 2017, the Bank of Russia Board of Directors decided to reduce the key rate by 25 bp to 8.25% per annum. The Board notes that inflation holds close to 4%. Its downward deviation against the forecast is driven mainly by temporary factors. The economy continues to grow. Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent. Medium-term risks of inflation overshooting the target dominate over the risks of its persistent downward deviation. In recognition of this, the Bank of Russia’s ongoing transition from moderately tight to neutral monetary policy is gradual.

Moving forward, the Bank of Russia’s key rate decisions will be based on its assessment on the balance of risks for inflation significantly and persistently deviating in either direction from the target, as well as consumer price movements and economic activity against the forecast. The Bank of Russia Board of Directors leaves open the option of further rate reduction at its upcoming meetings.

In making its key rate decision, the Bank of Russia recognised the following factors.

Inflation dynamics. Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.

Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.

Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.

Monetary conditions lay the groundwork for inflation holding close to 4% and not constraining economic growth. Nominal rates on banking transactions continue to trend downwards, tracking the key rate path in the expectation of its reduction. Rates in real terms remain in positive territory. Non-price lending conditions are gradually becoming looser for reliable borrowers but are tight nonetheless.

The current conditions encourage incentives to save and ensure that consumption growth is balanced. Gradual loosening in monetary policy alongside low risk appetite of both banks and borrowers is bringing about conditions for a gradual transition from a savings behaviour model to consumption growth.

Economic activity. According to Bank of Russia estimates, Q3 GDP growth continued in line with the forecast. Farm output increased while mechanical engineering output, freight turnover and the production of durable consumer goods all showed a positive trend. The recovery in consumption is becoming steadier. Consumer demand is shored up by real wage growth driven by inflation slowdown. Unemployment is at a level at which it does not affect inflation.

The Bank of Russia’s estimate of the economic development path throughout 2017 and in the medium term has remained unchanged.

Inflation risks. A number of factors bear the risk of inflation deviating from the target both upwards and downwards. On the short-term horizon, among these factors are food price movements triggered by the supply of farm produce. In the forthcoming months, food price growth will largely depend on crop quality and preservation. Price movements on global commodity markets pose a risk in the medium term if they deviate considerably upwards and downwards from the forecast. The fiscal rule will set off the impact of external economic conditions on inflation and the domestic economic environment as a whole.

Medium-term risks of inflation overshooting the target dominate over the risks of its persistent downward deviation. The main risk sources of inflation overshooting the target in the medium term remain unchanged. First, increasing structural labour shortage may cause labour productivity growth to considerably lag behind wage growth. Second, inflationary pressure may stem from households’ shrinking propensity to save. Third, inflation expectations remain elevated and subject to fluctuations caused by movements in prices of certain goods and services and the exchange rate.

Given the balance of risks for inflation the Bank of Russia’s ongoing transition from moderately tight to neutral monetary policy will be gradual.

Moving forward, the Bank of Russia’s key rate decisions will be based on its assessment on the balance of risks for inflation significantly and persistently deviating in either direction from the target, as well as the dynamics of economic activity against the forecast. The Bank of Russia Board of Directors leaves open the option of further rate reduction at its upcoming meetings.

The Bank of Russia Board of Directors will hold its next rate review meeting on 15 December 2017. The Board decision press release is to be published at 13:30 Moscow time.

Interest rates on the Bank of Russia operations

(% p.a.)

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