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The Bank of Russia cuts the key rate by 25 bp to 7.50% per annum

On 14 June 2019, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 7.50% per annum. Annual inflation slowdown is continuing. In May, households’ inflation expectations and business price expectations did not materially change and remain elevated. Economic growth in the first half of 2019 is lower than the Bank of Russia’s expectations. Short-term proinflationary risks have abated compared to March. In these circumstances, in line with the pursued monetary policy, the Bank of Russia has lowered its end-of-year annual inflation forecast for 2019 from 4.7-5.2% to 4.2-4.7%. Moving on, according to the Bank of Russia’s forecast, annual inflation will stay close to 4%.

If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to neutral monetary policy until mid-2020. 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. Annual inflation slowdown is continuing. Annual consumer price growth rate declined in May to 5.1% (from 5.2% in April 2019) and reached an estimated 5.0% as of 10 June. That said, starting in February, seasonally adjusted monthly consumer price growth has remained close to 4% (annualised).

Consumer demand trends constrain inflation. Also, temporary disinflationary factors contributed to slowing consumer price growth, among those ruble appreciation since the beginning of the year and the high base effect in respect of the price dynamics of principal types of motor fuel.

In May, households’ inflation expectations and business price expectations did not materially change and remain elevated.

In line with the pursued monetary policy, the Bank of Russia has lowered its end-of-year annual inflation forecast for 2019 from 4.7-5.2% to 4.2-4.7%. The revised forecast takes into account the completion of the VAT increase pass-through to prices (including the influence of secondary effects) and the preservation of relatively favourable external conditions and moderate dynamics of domestic demand. Moving on, according to the Bank of Russia’s forecast, annual inflation will stay close to 4%.

Monetary conditions. Monetary conditions have somewhat eased since the last Board meeting. Among other things, this was driven by the change in expectations of financial market participants with regard to the Bank of Russia’s key rate path. OFZ yields and deposit rates have declined. The potential for lending rates growth has mostly exhausted. That said, the Bank of Russia’s decision to cut the key rate and the year-to-date decline in OFZ yields create conditions for the decline of deposit and lending rates in the future.

Economic activity. Economic growth in the first half of 2019 is lower than the Bank of Russia’s expectations. In January-April, the annual industrial production growth rate remained close to the readings of 2018 Q4. Export growth rates have declined amid weakening external demand. Investment activity remains muted. Annual retail sales growth rate has been slowing down since February on the back of moderate dynamics of household income. Consumer demand and labour market conditions create no excessive inflationary pressure.

During the first four months of the current year, the growth in general government income outperformed the growth in expenses, which, in part, is due to the shift to the second half of the year of the implementation of a number of national projects planned by the Government. In the second half of 2019, the incremental budget revenues will be used to raise government spending, including investment.

Taking into account GDP growth statistics for 2018 — 2019 Q1 published by Rosstat, the Bank of Russia lowered its GDP growth forecast for 2019 from 1.2-1.7% to 1.0-1.5%. Subsequent years might see higher economic growth rates as national projects are implemented.

Inflation risks. Short-term proinflationary risks have abated compared to March. The effects of the VAT hike have fully materialised. The revision of the interest rate paths by the US Fed and other central banks in advanced economies in 2019 H1 reduces the risks of persistent capital outflows from emerging markets.

That said, significant risks are posed by elevated and unanchored inflation expectations, as well as by several external factors. In particular, the risk of a slowdown in global economic growth still looms caused, among other things, by the further tightening of international trade restrictions. Geopolitical factors might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations. Supply-side factors in the oil market may amplify volatility of global oil prices.

The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements, prices of individual food products, and possible changes in consumer behaviour. These risks remain moderate.

The mid-term inflation dynamics may be affected by fiscal policy parameters, including decisions on the use of the liquid part of the National Wealth Fund in excess of the threshold level set at 7% of GDP.

If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to neutral monetary policy until mid-2020. 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.

The Bank of Russia Board of Directors will hold its next rate review meeting on 26 July 2019. The Board decision press release is to be published at 13:30 Moscow time.

In the follow-up to the Board of Directors meeting of 14 June 2019 the Bank of Russia released its medium-term forecast.

14 июня 2019 года

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