On 16 December 2016, the Bank of Russia Board of Directors decided to keep the key rate at 10.00% per annum. The Board of Directors notes that the dynamics of inflation and economic activity are overall in line with the forecast and inflation risks have subsided somewhat. Consumer price growth is slowing down in part under the influence of temporary factors, while reduction in inflation expectations remains unstable. Given this decision and considering that the moderately tight monetary policy is maintained, inflation will slow to the 4% target in late 2017. As the trend towards a sustainable decline in consumer price growth takes root, the Bank of Russia will consider an opportunity of cutting the key rate in the first half of 2017. When making its key rate decisions in the months ahead, the Bank of Russia will assess inflation risks alongside with the alignment of inflation dynamics and economic performance with the baseline forecast.
In making its key rate decision, the Bank of Russia Board of Directors proceeded from the following:
Inflation dynamics. Annual inflation continues to decline in line with the Bank of Russia’s baseline forecast. However, this is partly due to temporary factors. According to estimates, as of 12 December 2016 annual price growth fell to 5.6% from 6.1% in October. Price growth has slowed down noticeably in all key groups of goods and services and monthly seasonally adjusted inflation indicators have declined as well. The ruble exchange rate dynamics continues to be conducive to inflation deceleration as oil prices have been higher than expected and Russian financial assets remain attractive to external investors. A good harvest still facilitates a reduction in food inflation. At the same time, a more confident drop in non-food price growth is necessary for sustainable inflation decline.
Households prefer to stick to a savings behaviour model, however, the disinflationary impact of domestic demand is subsiding gradually. Annual growth in real wages may facilitate a gradual recovery of demand for goods and services. Consumer lending dynamics do not entail material inflation risks so far. Moderately tight monetary conditions need to be maintained in order to encourage households to save and set the trend towards sustainable inflation reduction under the impact of the demand-side constraints. This will enable a further decline in inflation expectations of both households and businesses. According to the Bank of Russia forecast, given the decision made annual inflation will slow to the 4% target in late 2017.
Monetary conditions. Moderately tight monetary conditions are still conducive to inflation reduction. Positive real interest rates will be kept at the level which will ensure demand for loans without an intensification of inflationary pressure and will also preserve incentives for savings. The potential of interest rate reduction is limited in the near future.
Economic activity. The economy is progressing towards recovery in line with the Bank of Russia’s baseline forecast. The estimates show that quarter-on-quarter GDP was no longer in decline in Q3 and industrial production expanded in October—November. However, the rebound in economic activity is still heterogeneous among industries and regions. Import substitution is advancing together with certain non-commodity exports and new lines of industrial growth, including the high-tech development. Business activity in services is also on the rise. Positive trends will take time to evolve and take hold.
By the end of 2016, the output of goods and services will decrease by 0.5-0.7% with a slight growth in quarterly GDP to be seen in Q4. We expect moderate economic growth of less than 1% in 2017 and an increase to 1.5-2% in 2018-2019. The labour market is adapting to the new economic conditions and unemployment remains persistently low. The forecast is based on conservative assumptions about sluggish global growth, year-average oil prices of $40 per barrel for the entire forecast horizon, moderate capital outflow and structural constraints in the Russian economy.
Inflation risks. Risks that inflation fails to achieve the 4% target in 2017 have subsided somewhat. These risks stem largely from the inertia of inflation expectations and a decrease in household propensity to save. Price volatility in global commodity and financial markets may also have an adverse impact on exchange rate and inflation expectations. Approving of conservative budget consolidation strategy, including moderate indexation of wages and pensions in the medium-term horizon, makes an uncertainty and inflation risks from fiscal policy subside. At the same time, these risks might increase if government spending rise in higher oil price scenario.
As the trend towards a sustainable decline in consumer price growth takes root, the Bank of Russia will consider an opportunity of cutting the key rate in the first half of 2017. When making its key rate decisions in the months ahead, the Bank of Russia will assess inflation risks alongside with the alignment of inflation dynamics and economic performance with the baseline forecast.
The Bank of Russia Board of Directors will hold its next rate review meeting on 3 February 2017. The press release on the Bank of Russia Board’s decision is to be published at 13.30 Moscow time.
Interest rates on the Bank of Russia major operations