Russia’s Central Bank lowers its key interest rate

Russia’s Central Bank lowers its key interest rate

The board of directors of Russia’s Central Bank has decided to cut its key interest rate to 10.5% for the first time in nearly a year.

The Central Bank noted "the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy".

"Slowing inflation allows more certain reliance on sustainable inflation reduction to less than 5% in May 2017 and the 4% target in late 2017, taking into account the decision just made and the retention moderately tight monetary policy," the press service of the Central Bank said.

The bank also said that it "will consider the possibility of a further cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory".
When deciding on the key rate, the board of directors of Russia’s Central Bank took into account a number of factors.

The first factor was increased confidence in the sustainability of positive trends in the dynamics of inflation. The second factor was the fact that "the positive trends in the economy are not accompanied by increased inflationary pressures."

"Monetary conditions will remain moderately tight, despite their softening due to the decline in banking sector liquidity shortage," the bank named the third factor. "Real interest rates will remain at a level promoting savings and providing demand for credit, which does not lead to an increase in inflationary pressures," the Bank of Russia added.

"The risk that the bank will not meet its target of 4% inflation by the end of 2017 declined, but remain increased," the bank named the fourth factor.

"This is due to the inertia of inflation expectations, the lack of medium-term fiscal consolidation strategy, the uncertainty of future indexation of wages and pensions parameters The volatility of global commodity and financial markets may also have a negative impact on the exchange rate and inflation expectations," the press service of the Central Bank said.

The next meeting of the board of directors of Russia’s Central Bank in 2016 is scheduled for July 29.

The head of the Regional Banking Association and chairman of the Duma Committee on Economic Policy, Innovation and Entrepreneurship Development, Anatoly Aksakov, speaking with a correspondent of Vestnik Kavkaza, noted a significant reduction in inflation since the last change in the key rate on August 3. "A decline in inflation was accompanied by stabilization of the ruble and falling demand for credit. Due to these factors, the Central Bank decided to stimulate lending, because in the case of controlling it slows down the economy," he said.

"I believe the Central Bank could have done this much-needed step earlier, but this reduction in the rate should be welcomed as well. Of course, 0.5% is not so much in material terms, but still it is a signal for the banking system about the Central Bank's readiness to respond to the objective problems of credit institutions and the economy as a whole. Accordingly, it is a signal for the business either that the Central Bank responds to changes in a positive direction," Anatoly Aksakov stressed, adding that we can expect that the board of directors of Russia’s Central Bank will lower the interest rate at the next meeting.

The head of the finance, monetary circulation and credit department at RANEPA, Alexander Khandruev, agreed that the decline in the rate at this meeting of the board of directors of Russia’s Central Bank was expected. "Inflation expectations decreased, and although deflationary expectations are still moderately high, a positive trend is in place. Therefore,it was a right thing to do. In some degree the change in the rate was of a test - doing this the CB looks how this may affect the inflation expectations," he explained.

According to the expert, the reduction in the rate by 0.5% shows that the number of risks in the financial market has become smaller. "This may contribute to the revival of economic activity - lending and placement of securities. As bond yields will now be lower, there will be more favorable conditions. Of course, the rate is an important macroeconomic parameter, but it acts only in combination with other factors. We cannot expect miracles from the rate of 10.5%," he warned.

"As a result, we can say that the decision of the Russian Central Bank was justified. I also spoke in favor of a rate cut by 0.5% in expert polls. This is a reasonable decision in this situation," Alexander Khandruev concluded.