Russia's central bank extends key rate pause
The Board of Directors of the Russian Central Bank has kept the key rate at the level of 7.25% today again.
It was the third consecutive board meeting the bank had decided to hold the key rate, citing risks of higher inflation. Controlling inflation is the bank’s main target.
Explaining its decision, the central bank cited an increase in value-added tax (VAT) to 20% from next year from the current level of 18%, a move it warned would translate into higher inflation already this year.
"Uncertainty persists over how strongly the tax measures may affect inflation expectations and how the external conditions will develop," the central bank said in a statement.
According to the statement, annual inflation, at 2.3% in June, was on track to accelerate to 3.5-4.0 by the end of the year and exceed the central bank’s 4.0% target in 2019.
The central bank said monetary conditions are now close to neutral. "The Bank of Russia considers that monetary policy is highly likely to shift to a neutral stance in 2019," it said.
The central bank cut the key rate twice earlier this year, before the announcement from the government it would raise VAT. Before that announcement, the bank had said it planned to switch to a so-called neutral monetary policy in 2018, bringing the key rate into a range of 6-7%
The next meeting of the Board of Directors of the Russian Central Bank in 2018 is scheduled for September 14.
Professor of the RANEPA faculty of Finance, Money Circulation and Credit, Yuri Yudenkov, speaking to Vestnik Kavkaza, noted that the Central Bank had every reason to cut the key rate.
"I expected the Central Bank to lower the rate. There are no special risks, except for a possible strengthening of sanctions from the U.S. Other risks, both credit and deposit ones, are fully calculated. The GDP growth is positive now, although it is only about 1.5%. So that it would be possible to improve the credit situation on the market by lowering the key rate by 0.25%. It would not change the situation much, but the country needs to change the economic climate. So today's decision was dictated solely by the caution of the Central Bank's current leadership," the expert said.
He also shared his opinion on the rate cut level the Central Bank can make at the next meeting without risking to disperse inflation. "There will be no risk if the rate is cut by 0.25%. Of course, the situation is aggravated by the growing trade war between China and the US," the professor of the RANEPA faculty of Finance, Money Circulation and Credit explained.
The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, reported that, judging by the results of the survey on the population's inflation expectations in June and May, these inflation expectations increased against the backdrop of VAT rate hike, problems with gasoline prices, housing and communal services and some others. Accordingly, the expert pointed out that the regulator has no motive to cut the rate, and we can even expect that it may start raising it.
"In any case, the growth of inflationary expectations with a noticeable weakening of the ruble may lead to an increase in the rate, which became a significant risk," he explained.
Alexander Abramov admitted that the Bank of Russia would like to cut the key rate, but is forced to rely on inflationary expectations of the population. In addition, he added, the currencies of many developing countries are weakening, forcing many countries - Brazil, Turkey, Argentina and others - to raise key rates. "Therefore, in order to understand the direction in which the monetary policy of the Central Bank will change, we should follow the trends within 2-3 months," Alexander Abramov concluded.