On 7 February 2020, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 6.00% per annum. Inflation slowdown is overshooting the forecast. Households’ inflation expectations and price expectations of businesses remain stable overall. In 2019 H2, the growth rate of the Russian economy picked up. Risks of a substantial global economic slowdown persist. Disinflationary risks still exceed pro-inflationary risks over the short-term horizon. In this context, given the monetary policy stance, annual inflation will come in at
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect 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 of financial markets.
Inflation dynamics. Inflation slowdown is overshooting the forecast. The annual consumer price growth rate declined to 2.4% in January (from 3.0% in December 2019) as a result of both factoring out the effect of the VAT rate hike and moderate price growth in January. January results show that annual core inflation decreased to 2.7% as compared to 3.1% in December. According to the Bank of Russia’s estimates, inflation indicators reflecting the most sustainable price movements are close to or below 3%.
In January, disinflationary factors continued to exert considerable influence on inflation. Annual growth in prices of food products and non-food goods continued to decline. Expanded supply in individual food market segments helps maintain low monthly (seasonally adjusted) and annual growth rates of food prices. The 2019 ruble appreciation alongside with inflation slowdown in Russia’s trading partners limits growth of import prices. Subdued demand continues to influence inflation, including external demand.
In January, households’ inflation expectations somewhat abated, while remaining elevated. Business price expectations remain stable. Annual inflation slowdown paves the way for a future decline in inflation expectations of households and businesses.
In accordance with the Bank of Russia forecast, given the monetary policy stance, annual inflation will come in at
Monetary conditions. Monetary conditions have continued to ease. OFZ yields and deposit and lending rates continued to decline. The Bank of Russia’s decisions to cut the key rate and the decline in OFZ yields create conditions for a further reduction in deposit and lending rates; this will support the expansion of corporate and mortgage lending. At the same time, consumer lending gradually slows down, which is to a large extent driven by the tightening of non-price conditions under the influence of the Bank of Russia’s macroprudential measures.
The Bank of Russia will assess the effect of the adopted key rate decisions on monetary conditions and inflation movements.
Economic activity. Rosstat’s flash estimate shows that 2019 GDP growth totalled 1.3%, which corresponds to the upper bound of the Bank of Russia’s forecast of
In Q4, economic activity indicators mainly continued to improve. At end—2019, investment activity was supported by an accelerated increase in capital budget expenditure, including owing to the implementation of national projects. Annual retail trade turnover and industrial production continued to grow. However, leading indicators point to a still weak business sentiment in industrial sector, which is mostly specific of export orders. Economic activity continues to be constrained by weakening external demand for Russian exports on the back of a global economic slowdown.
The labour market creates no additional inflationary pressure. The fact that unemployment remains near historic lows is not driven by expanding labour demand but rather by a simultaneously contracting number of employees and the labour force.
The Bank of Russia has left the
Inflation risks. Disinflationary risks still exceed pro-inflationary risks over the short-term horizon. This is primarily related to the state of domestic and external demand. Disinflationary risks associated with movements in the prices of certain food products persist, including on the back of a rising supply. The 2019 ruble appreciation may continue to influence price growth. The reaction of both consumer and investment demand of the private sector to the easing of monetary conditions and accommodative fiscal measures may be limited by the moderate sentiment of consumers and businesses.
Meanwhile, pro-inflationary factors should be taken into consideration. Risks that food market trends may reverse cannot be ruled out, given that the ratio of temporary and permanent factors for this market is hard to estimate. At the same time, the monetary policy easing that has already been undertaken may have a stronger upward effect on inflation than the Bank of Russia estimates.
Risks associated with trade disputes have somewhat abated. Nonetheless, the risk of a further slowdown in global economic growth persists, including under the influence of geopolitical factors, intensified volatility in global commodity and financial markets, which may affect the exchange rate and inflation expectations. The coronavirus situation will be an additional uncertainty factor over next quarters.
According to Bank of Russia estimates, the implementation of additional social measures announced in January will not have a considerable pro-inflationary impact. At the same time in 2020, inflation dynamics will be shaped by the schedule of budget expenditure.
A number of internal conditions continue to pose pro-inflationary risks over a longer-term horizon. Significant risks are posed by elevated and unanchored inflation expectations. The
The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements and possible changes in consumer behaviour. These risks remain moderate.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect 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 of financial markets.
In the follow-up to the Board of Directors meeting of 7 February 2020 the Bank of Russia released its medium-term forecast.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 20 March 2020. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.
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