On Bank of Russia key rate

On 11 September 2015, the Bank of Russia Board of Directors decided to maintain the key rate at 11.0 percent per annum, due to the higher inflation risks amid persistent risks of considerable economy cooling. August saw a serious deterioration in foreign economic conditions. Inflation and inflation expectations were showing a clear upward trend, impacted by the exchange rate dynamics. The depreciated ruble will continue to put pressure on prices in the next few months. However, the relatively tough monetary conditions and slack domestic demand will drag down annual inflation. The annual consumer price growth rate in September 2016 is estimated to be about 7%, reaching 4% in 2017, which will be facilitated by the current monetary policy. The Bank of Russia will subsequently revise its key rate based on the balance between inflation risks and the risks of economy cooling.

Annual inflation rose from 15.6% in July to 15.8% in August. As of 7 September 2015, consumer price growth remained unchanged, according to the Bank of Russia’s estimates. The ruble’s depreciation caused prices for a wide range of goods and services to accelerate, which was the reason for elevated inflation expectations, along with the July indexation of utility tariffs. The ruble’s decline observed in July-August will continue to put pressure on inflation in the next few months. The moderately tough monetary policy and weaker consumer demand on the back of significant contraction in real income are projected to hamper consumer price growth.

The relatively tough monetary conditions also contain prices. Money supply (М2) growth rates remain low. Lending and deposit rates show a downward trend under the influence of the Bank of Russia’s previous decisions to cut its key rate. On the one hand, this serves to keep ruble savings attractive; on the other hand, such rates sustain a high debt burden and tight creditworthiness requirements, leading to low annual bank credit growth rates.

According to Rosstat estimates, GDP in Q2 2015 dropped by 4.6%. July saw some signs of stabilisation in production and consumption decline. Yet, the energy price slump, highly volatile global financial markets, and a grim outlook for economic growth in emerging economies exacerbate the risks of economic cooling in Russia. While structural factors are still curbing economic growth, current drop in production is of a cyclical nature. This is evidenced by low consumer and business confidence, as well as reduced utilisation of production capacities. However, the negative demographic trends keep unemployment low, while the labour market is adjusting to the new conditions largely through wage cuts and wider part-time employment. These factors, along with low level of retail lending, will result in further contraction of consumer spending. Fixed capital investment is predicted to continue on their downward path, driven by negative business expectations with regard to Russia’s economic outlook and tight lending terms. Limited potential substitution of external finance with domestic one will be among the factors which, following the narrow nature of the Russian financial market and its high debt load, are likely to constrain investment demand. Still, investment is due to receive some support from the governmental anti-crisis programme.

Weak investment and consumer activity will cause low demand for imports. Export volumes are expected to grow slightly, against the background of the floating exchange rate. As a result, net exports will be the only positive contributor to the annual output growth. Taking into account Q1 GDP data and the negative changes in external conditions, output is forecast to contract by 3.9-4.4% in 2015.

Going forward, the economic situation will depend on the global energy prices and the economy’s ability to adjust to external shocks. As a baseline scenario, the Bank of Russia considers that the oil price will linger at about $50 for the next three years. In these conditions, a decline in quarterly GDP growth is expected to be more protracted than previously forecast. Weak domestic demand and the relatively tough monetary conditions will trigger annual inflation reduction in 2015-2017. A slowdown in the annual consumer price growth will create prerequisites for further decrease in inflation expectations. In early 2016, annual inflation is expected to slow considerably due to, among other factors, its high base of 2015. The Bank of Russia forecasts the annual consumer price growth to be about 7% in September 2016 and to reach the 4% target in 2017, facilitated by the ongoing monetary policy.

Key sources of inflation risks include a further worsening of external climate, persistently high inflation expectations and the revised planned 2016-2017 rate and price growth in the regulated sector, while social payments will be indexed and the overall budget policy will be eased.

Moving forward, the Bank of Russia will make decisions on its key rate based on the changing balance of inflation risks and the risks of economy cooling.

The next meeting of the Bank of Russia Board of Directors to review its key rate is scheduled for 30 October 2015. The press release on the Bank of Russia Board of Directors’ decision is to be published at 13:30 Moscow time.

Interest rates on the Bank of Russia major operations¹
(% p.a.)

¹ Information on interest rates on the Bank of Russia operations is given in the Table ‘Interest rates on the Bank of Russia operations’.

² Floating interest rate linked to the level of the Bank of Russia key rate.

³ Fine-tuning operations.

Information notice ‘On the procedure for conducting fine-tuning operations’.

Information notice ‘On fine-tuning operations to absorb liquidity’.

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