JULY 2020

Monetary Policy Report

Key rate reduction

Inflation forecast
for the year-end 2021

Room may remain for further easing of monetary policy;
the Bank of Russia will consider its necessity

Disinflationary pressure persists

Inflation and BoR key rate, YoY

Risks of inflation deviating downwards from the 4% target in 2021 persist.

The restraining effect of aggregate demand on consumer price trends will not taper off in 2021.

Inflation will be returning to the 4% target gradually since it will take time for demand to recover, including owing to the easing of monetary policy.

Economic recovery will be gradual and non-uniform

GDP growth rate, YoY

The economy will be returning its potential progressively. GDP will decline by 4.5–5.5% in 2020. Further on, GDP is expected to follow a recovery path with growth predicted to total 3.5–4.5% in 2021 and 2.5–3.5% in 2022.

Economic activity will be supported by the easing of monetary policy and the Bank of Russia’s regulatory measures, as well as by the expansion of fiscal policy measures.

The key rate reduction is contributing to the easing of monetary conditions

OFZ yields and the Bank of Russia key rate, %

Credit and deposit rates have decreased, including as a result of the earlier decisions to cut the key rate.

The regulatory easing and preferential lending programmes are also contributing to the easing of monetary conditions. 

Yield spreads between corporate bonds and federal government bonds (OFZ) have lowered, coming close to the readings of early 2020. Concurrently, elevated credit risks are hindering the reduction in interest rates. These conditions required a considerable decrease in the key rate in April–July (of 1.75 pp, to 4.25%). 

The neutral rate range has been revised downwards

The Bank of Russia has also reviewed downwards the estimated range of the real neutral key rate from 2–3% to 1–2% per annum. This is in line with the nominal neutral interest rate of 5–6% per annum, given that the inflation target is close to 4%.

The neutral rate range has been adjusted due to both lower interest rates in the global economy and the decrease in the sovereign risk premium for Russia.

Disinflationary risks still prevail over proinflationary ones

Downward pressure on prices may arise from the following factors: a slower-than-expected recovery of demand and the economy, persistent changes in the households' preferences and behaviour together with higher propensity to save.

On the other hand, short-term proinflationary pressure may be caused by disruptions in logistics and production chains amid the remaining restrictions, extra costs incurred by businesses, and the materialisation of deferred demand if it turns out to be higher than expected.

Medium-term inflation dynamics will be significantly impacted by fiscal policy, specifically by the scale and efficiency of measures being implemented to mitigate the consequences of the coronavirus pandemic and to overcome structural constraints.


If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. 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