Russia’s Central Bank reduces key rate by 3%

Russia’s Central Bank reduces key rate by 3%

The board of directors of Russia’s Central Bank decided to cut the key rate by 25 basis points (which is 3% of the previous rate of 8.25% per annum) at the meeting on October 27.

The board said that inflation holds close to 4%. Its downward deviation against the forecast is driven mainly by temporary factors, the regulator said, while the economy continues to grow.

The regulator left open the option of further rate reduction at its upcoming meetings. It also noted a gradual transition from moderately tight to neutral monetary policy.

Moving forward, the key rate decisions will be based on its assessment on the balance of risks for inflation significantly and persistently deviating in either direction from the target, as well as the dynamics of economic activity against the forecast, the report said.

The bank leaves open the option of further rate reduction at its upcoming meetings. Moving forward, the Bank of Russia’s key rate decisions will be based on its assessment on the balance of risks for inflation significantly and persistently deviating in either direction from the target, as well as the dynamics of economic activity against the forecast, the report said. 

The report notes that the bank will continue moving gradually from moderately rigid to neutral monetary policy. "Given the balance of risks for inflation the Bank of Russia’s ongoing transition from moderately tight to neutral monetary policy will be gradual," the regulator said.

The Bank of Russia board of directors will hold its next rate review meeting on December 15, 2017.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking with Vestnik Kavkaza, noted that by slowly declining the key rate, despite the ultra-low inflation of recent weeks, the Central Bank wants to show that it does not intend to take drastic steps. "It seems to me that it is afraid of problems with the exchange rate, because if one quickly reduces the rate, credit resources will be more available, and part of rubles may end on the foreign exchange market," he suggested.

In total, the Central Bank cut the rate by 1.75 percentage points (from 10% to 8.25%), but it turned out to be an almost imperceptible event for Russia's business and financial sector. "In my opinion, other factors have been more visible for businessmen during the year, such as rising oil prices and improving the bank situation in terms of profitability," Alexander Abramov explained.

In his estimation, the Central Bank may reduce the key rate to 5-6%. "The question of how much the Central Bank is able to lower the rate while keeping inflation at 4% is complicated." The expectations of the population for inflation will be around 9%, but if they are not considered, then 5-6% is a reasonable rate. At the same time when it is profitable for the Central Bank, it starts to rely on the expectations of the population, saying that it is impossible to cut the rate too much. 1-2 percentage points to inflation would be a quite comfortable level of the key rate if the CB was confident that a policy mitigation would ensure economic growth, not weakening national currency," the professor at the department of the stock market and investments at the Higher School of Economics concluded.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA, Konstantin Korischenko, in turn, noted that the Central Bank wants to keep as much space for maneuvers as possible, reducing the key rate so slowly.

"It could be noticed by the reduction of bank lending and deposit rates, but it was mainly not because of the rate, but because of inflation.When the rate was 10%, inflation was about 6%, so the difference between them was 4 percentage points. And now the rate is 8.25%, and inflation has reached 2.75%, that is, the difference between them is 5.5 percentage points. It turns out that the Central Bank's process is not the easing of conditions for economy, but some kind of tightening because the decline in the key rate is not keeping up with the decline in inflation," Konstantin Korishchenko drew attention.

In his opinion, the Central Bank may lower the rate by another 1.75 percentage points. "I think that even in today's conditions it is possible to safely lower the rate to 6.5%. That is, today the main trend is a gradual reduction in the rate with the possibility of its further reduction in a fairly long period," the head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA summarized.

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