Has Russian Central Bank 'frozen' key rate?

Has Russian Central Bank 'frozen' key rate?

The Board of Directors of the Russian Central Bank decided to keep its key interest rate at 11% today.

Against the backdrop of another oil price slump, monthly consumer-price growth rates have stabilized at a high level with a higher risk of accelerated inflation, the Central Bank said.

"The deterioration in global commodity markets will require a further adjustment of the Russian economy. The Bank of Russia said price growth will resume its decline below 7% in next January and 4% by late 2017. The Bank of Russia can’t rule out a tightening of its monetary policy if inflation risks amplify," the Central Bank said.

The central bank pointed out that financial stability risks have increased since the December meeting of the Board of Directors. "Excess supply in the oil market, slowdown of the Chinese economy, as well as increase in the base interest rate by the US Federal Reserve System led to a further drop in oil prices," the press release notes.

The next meeting of the Board of Directors of the Russian Central Bank in 2015 is scheduled for March 18.

The associate professor of stock markets and financial engineering of RANEPA, Vasiliy Yakimkin, in an interview with a correspondent of Vestnik Kavkaza noted that the Central Bank had only two options – either to leave the rate unchanged or raise it. If they said clearly that the rate will be raised at the next meeting in March, it would be reasonable for the Bank of Russia to raise it. But since the Federal Reserve virtually admitted its actions of 16 December 2015 to be wrong, it is clear that the pressure from the currencies of the developed economies on the ruble will be less than expected," the expert said.

In this regard, he emphasized the fact that the regulator acted quite reasonably by leaving the rate unchanged. "Actually, if the Bank of Russia had lowered the rate, Russian macroeconomics would have undergone a great risk: a further devaluation of the ruble and, respectively, the threat of galloping inflation," the economist said.

In addition, he drew attention to the fact that the oil market and the US Federal Reserve policy may make the Central Bank raise or lower the key rate in the future. According to the expert, if Brent will cost $45-55 per barrel at the end of the year, then the ruble will require less effort for the protection of the main regulator.

He stressed that a decline in oil prices to $20 per barrel could be another shock for the Russian economy. "Then the Bank of Russia will have to raise the rate, but such a scenario is unlikely today, the situation in the oil market is improving," the associate professor of stock markets and financial engineering of RANEPA summed up.

In his turn, a researcher at the Center for Study of Structural Studies of the Institute of Applied Economic Researches of RANEPA, Mikhail Khromov, said that the Central Bank's decision on the key rate is due to persistence of inflationary risks, including the weakening of the ruble. "As the Central Bank is mainly focused on inflation expectations, the frozen rate reflects its view that the slowing of inflation isn't enough," he said.

According to the expert, the need for a rate increase may occur if inflation expectations will grow, for example, in the case of a serious devaluation of the ruble, when the controller will fix a significant impact of the rate on prices.

In addition, he stressed that the inflation is gradually slowing in comparison with December 2015. "The annual rate of consumer prices is also slowing down and if nothing changes, the reason for the rate cut may appear," Mikhail Khromov concluded.

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