Monetary policy goals and principles

In order to achieve the inflation target, the Bank of Russia implements monetary policy within the inflation targeting regime. The consistency, predictability and transparency of the central bank’s actions are crucial in pursuing monetary policy. Therefore, the Bank of Russia’s monetary policy is based on a range of principles.

1. The Bank of Russia sets a permanent public quantitative inflation target for households, businesses and financial market participants to be able to factor in this indicator when planning their activity and making decisions. The inflation target is set for the annual growth rate of consumer prices, that is, the change in prices for goods and services purchased by households over the last 12 months.

   The goal of the Bank of Russia’s monetary policy is to maintain annual inflation close to 4% on a continuous basis. The wording ‘close to 4%’ implies that inflation may slightly fluctuate around the target.

   More details on inflation

   In the case of a significant deviation of inflation form the target, the Bank of Russia assesses the reasons for and the duration of the deviation in order to make appropriate decisions on monetary policy measures that would help bring inflation back to the target.

2. The inflation targeting regime involves a floating exchange rate determined by supply and demand in the currency market. Under the floating exchange rate regime, the Bank of Russia carries out no interventions in the domestic foreign exchange market to maintain any specific exchange rate or the pace of its movements. That said, the Bank of Russia may conduct foreign currency transactions in the domestic market in the case of a threat to financial stability, as well as to replenish (tap) foreign currency reserves based on the fiscal rule being implemented by Russia’s Ministry of Finance.
   More details on the floating exchange rate policy
3. The key rate is the main instrument of the Bank of Russia’s monetary policy.

   Changing the key rate, the Bank of Russia influences the movement of interest rates in the economy, which in turn impacts domestic demand and inflation.

   More details on how the Bank of Russia influences inflation

   The Bank of Russia Board of Directors makes its key rate decisions on a regular basis, specifically eight times a year, in accordance with the pre-approved and publicly available schedule.

   More details on how monetary policy decisions are made

   Any key rate decision is accompanied by an explanation of its logic and reasons, and, generally, by a signal regarding possible further monetary policy moves. The Bank of Russia’s explanation of its decisions and future intents is an important instrument for managing inflation expectations, that is, for what is called anchoring of inflation expectations to the target.

   The anchoring of the inflation expectations of both households and businesses to the inflation target is crucial to ensure the efficiency of measures being implemented by the central bank.

4. The Bank of Russia makes its monetary policy decisions relying on the macroeconomic forecast and the analysis of a wide range of data. The effect of monetary policy on price dynamics is not immediate: it takes time and involves a long chain of interconnections. Therefore, the assessment of the effect of a key rate decision on the economy and inflation requires a macroeconomic forecast.

   The Bank of Russia’s forecasts are based on up-to-date macroeconomic models. In preparing a macroeconomic forecast, the Bank of Russia estimates the duration of factors impacting the economy and price movements, and the stability of the existing economic trends.

   Measures pursued in other areas of domestic economic policy, as well as measures of economic policy in major foreign states are important factors the Bank of Russia considers when building its macroeconomic forecast.

   When formulating assumptions for the macroeconomic forecast and assessing existing risks, the Bank of Russia relies on a conservative approach, focusing on proinflationary factors and risks. This is associated with the fact that inflation expectations in Russia currently remain elevated and sensitive even to a temporary rise in prices for individual products. In such a situation, underestimation of proinflationary factors and risks may entail persistent and long-lasting deviations of inflation upwards from the target.

5. The Bank of Russia follows the principle of monetary policy transparency so as to enhance the understanding of and confidence in its current monetary policy and to create a predictable economic environment for all economic agents. The understanding of and confidence in the measures being implemented are critical for enhancing their efficiency.

   Within its transparency policy, the Bank of Russia first and foremost seeks to promptly and to the fullest extent possible communicate information on the goals, principles, measures and results of its monetary policy, as well as on the assessment of the economic situation and its prospects. The Bank of Russia also takes efforts to improve the outreach of its monetary policy and to make the communication more targeted.

   More details on how the Bank of Russia communicates its decisions