Russia’s Central Bank keeps key rate at 7.75%

Russia’s Central Bank keeps key rate at 7.75%

The board of directors of the Bank of Russia decided to keep the key rate at 7.75% per annum, the regulator said in a press release following the board meeting on Friday.

"If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in 2019," the central bank said in a statement.

While the central bank said inflationary expectations remained elevated after two rate hikes last year which it made to try to keep a lid on inflation, it has lowered its inflation forecast for 2019.

The bank said annual inflation is now seen slowing to 4.7-5.2% by the end of the year compared with up to 5.5% predicted previously.

According to the central bank, inflation was lower than expected because the impact of a value-added tax (VAT) increase had proven to be moderate.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on April 26, 2019. 

The advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, speaking to Vestnik Kavkaza, noted that the Central Bank preserves a wait and see position, exploring the impact of increased VAT on inflation rates. "The preservation of the key rate was absolutely predictable. In such conditions, it’s logical for the Central Bank to take a pause, which most likely will last at least until the middle of the year - because only by the middle of the year it will be clear how much the VAT increase will affect inflation," he said.

"In general, the key factor is not the time, but the price behavior: as soon as the Central Bank is convinced that inflation returns to the target level of 4%, the chances of cutting the rate will noticeably increase. But it depends on many reasons, for example, the harvest - if it is significant, food prices will decline. The economy must adapt to new conditions with the VAT rate of 20%. Usually it takes about two quarters, but it is impossible to predict with 100% probability that the rate will start to decline again in August-September," Sergey Hestanov added.

Head of the State Duma’s Committee for Financial Markets Anatoly Aksakov agreed with Hestanov. "I think the Central Bank is playing it safe, because the tendency associated with a decrease in inflation is still unclear. The Central Bank apparently decided not to give signals which could affect the exchange rate stability and inflationary expectations," he said.

"In addition, the U.S. Fed's statement that the refinancing rate will not rise during the whole year had an impact. Thus, a signal was given that the dollar should not strengthen during this period, and therefore a signal that the developing countries' currencies countries should be strengthened. It will also reduce inflation. Therefore, I think that the Central Bank can gradually start lowering the key rate in the second half of this year," Anatoly Aksakov concluded.