On 20 March 2020, the Bank of Russia Board of Directors decided to keep the key rate at 6.00% per annum. In February — March, the situation has been developing with a significant deviation from the Bank of Russia’s forecast under the baseline scenario. This is related to changes in external conditions: the spread of the coronavirus epidemic and a sharp drop in oil prices. The ruble’s depreciation is a temporary proinflationary factor. It might prompt annual inflation to exceed the target level this year. However, the dynamics of domestic and external demand will exert a meaningful constraining influence on inflation on the back of a pronounced slowdown of global economic growth and increased uncertainty. The package of measures adopted by the Government and the Bank of Russia ensures financial stability and will support the economy. All these factors were taken into account when making the key rate decision. Given the current monetary policy stance, annual inflation will return to 4% in 2021.
Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
Inflation dynamics. In 2020, inflation may temporarily exceed the target level. It is expected to return to 4% in 2021.
The temporary acceleration of annual inflation in the coming months will be caused by the weakening of the ruble in February — March, which is related to changes in external conditions: a worsening situation in global financial markets in the face of a threat of a global recession on the back of the coronavirus epidemic and a sharp drop in oil prices. The observed weakening of the ruble and the consecutive acceleration of consumer price growth rates may cause a temporary rise in inflation expectations of households and businesses.
However, slowing growth in both domestic and external demand is a significant disinflationary factor. It will have a constraining effect on inflation. In this context, given the current monetary policy stance, annual inflation will return to 4% in 2021.
Monetary conditions have tightened under the influence of negative external factors. The worsening situation in the global economy and a sharp drop in oil prices have prompted growth in risk premiums on a wide range of financial assets, including in emerging market economies. In this context, OFZ and corporate bond yields have increased, certain banks have started to raise their loan and deposit interest rates. The Bank of Russia’s measures taken to curb financial stability risks and regulatory relaxations adopted will support credit expansion, including in the most vulnerable sectors, and will help limit the scale of tightening of monetary conditions.
Economic activity. In February — March, the situation has been developing with a significant deviation from the Bank of Russia’s forecast under the baseline scenario. This is related to worsening global growth prospects amid the spreading coronavirus and restrictions on cross-border cargo and passenger traffic, as well as to a rapid deterioration of dynamics in global commodity and financial markets. These factors may cause the moderate growth of the Russian economy in the beginning of the year to change to a downturn of the economic activity in the coming quarters.
The Russian economy’s growth path will in many ways depend on the scale of the fallout from the further spread of the coronavirus and the action to counter it, alongside with the impact of this action on production, demand and business and consumer sentiment. The Russian economy will gain support from the package of the Government and the Bank of Russia’s economic measures to counter the consequences of the coronavirus pandemic and financial market volatility. Domestic demand is set to receive a boost this year from additional social policy measures announced in January, as well as the national projects being implemented as scheduled.
Inflation risks. There has been a rise in short-term proinflationary risks, driven by a potentially more pronounced pass-through of the ruble weakening into prices, coupled with the impact of the temporary increase in current demand for a number of products and services, triggered by consumers’ drive to accumulate stocks. However, a strong weakening of external demand, a potential decline in consumer activity and lag effects of the tightened monetary conditions may emerge as a source of significant disinflationary risks over a medium-term horizon.
Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
In parallel with its key rate decision, the Bank of Russia took a number of measures towards ensuring financial stability, supporting the economy and the financial sector amid the coronavirus pandemic. These measures are intended to, among other things, maintain access of small and medium enterprises to bank lending, shore up mortgage lending and protect the interests of people affected by the spreading pandemic. In a similar vein, there are plans to take action to relax administrative burden for the financial sector, with a view to supporting the sector’s lending capabilities.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 24 April 2020. The press release on the Bank of Russia Board decision and the medium-term forecast are to be published at 13:30 Moscow time.
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