Russia’s Central Bank cuts key rate to 7%

Russia’s Central Bank cuts key rate to 7%

The board of directors of Russia's Central Bank has cut its key rate today by 25 bp to 7.00% per annum.

Commenting on the decision, the regulator's press service said that inflation slowdown is continuing, but inflation expectations remain elevated. 

The Central Bank noted that Russian economy’s growth rate is still coming in lower than the Bank of Russia’s expectations, as well as stressed that risks of a global economic slowdown have increased. 

According to the regulator, risks of inflation accelerating or slowing down by the year-end are balanced. Du to this, the central bank said it had lowered its year-end inflation forecast to 4.0-4.5% from 4.2-4.7%.

According to the Bank of Russia’s forecast and taking into account the monetary policy stance, annual inflation will remain close to 4%.

If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at one of the upcoming Board of Directors’ meetings.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on October 25, 2019.

Head of the State Duma’s Committee for Financial Markets Anatoly Aksakov, speaking to Vestnik Kavkaza, noted that the Russian Central Bank is able to lower its key rate to a pre-crisis level thanks to a steadily decelerating inflation. "By the end of the year, inflation will reach the target of 4%, and next year, according to the forecasts of the Ministry of Economic Development, it will reach 3.6%. In August there was a deflation of 0.2%, for the first time in two years. Accordingly, there is currency stability and the stability of the financial sector as a whole," he said.

"The second factor is low economic growth, which forces them to work on reviving it. The key rate is the right tool for this purpose, since its reduction makes loans cheaper for both business and the public. It was also caused by external factors: the Fed has already cut its refinancing rate and plans to continue this trend," Anatoly Aksakov said.

According to the head of the State Duma’s Committee for Financial Markets, the Central Bank could reduce the rate by 50 percentage points today. "This would not affect inflation. But the Central Bank, apparently, decided to move in stages. I’m sure that there will be another 0.25% decrease at the next meeting of the board of directors, because there are objective conditions for a more significant reduction in the key rate," he stressed.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, in turn, suggested that a key rate could be reduced to 5% without threatening inflation targets.

At the same time, the Russian Central Bank continues to adhere to the slowest rate of declining the key rate. "This is done to take any negative consequences into account. In this case, with stagnating incomes, the key factor is moderate inflation, and while it continues to decline, the Central Bank could regularly cut the rate by 0.5%. Cutting 0.25% to 7% is a very small step when compared with the practices of other countries. Yes, in the U.S. the rate is reduced by 0.25%, since it is already 2.5-3%, but when the rate is 7%, it's too slow. But it's a signal that the Central Bank is aware of its reserves and will lower the rate further," Alexander Abramov concluded.