Russia's Central Bank keeps key rate unchanged

 Russia's Central Bank keeps key rate unchanged

The board of directors of Russia's Central Bank held its key interest rate at 7.75% today in line with market expectations, but said it could consider cutting rates as early as June.

"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 Q2-Q3 2019," the central bank said in a statement.

The bank had initially predicted that inflation would peak at 5.5% before slowing to its 4% target next year. But inflation, the main economic indicator it tracks, has been slightly lower than expected, hitting 5.3% last month.

"Annual inflation passed the local peak in March and started to subside in April. Consumer prices current growth rates track somewhat below the Bank of Russia forecast. In April, inflation expectations of households rose slightly after a tangible drop in March. Business price expectations continued to decline but remain at an elevated level. Short-term pro-inflationary risks have abated," the regulator said.

The central bank, which has said that two rate hikes last year seemed sufficient to curb rising consumer prices, said that inflation had passed its peak last month.

Expectations that the central bank will cut rates later this year have fuelled demand for OFZ government bonds in recent months because investors are eager to purchase the papers before their prices increase proportionally to a potential future cut.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on June 14, 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 continues to do everything to keep inflation at a level close to 4%. "It is important to note that the Central Bank said that it sees certain prospects for achieving a lower inflation. It is very likely that a decision to cut the rate will be made in a quarter," he said.

"Traditionally, food inflation is reduced due to the arrival of new lots of food in the autumn - and this is one of the factors that most likely will push the Central Bank to cut the rate. In general, it is unlikely that the rate will remain unchanged until the end of the year. If inflation approaches at least to 4.5%, it is very likely that the Central Bank will decide to cut the rate," Sergey Khestanov added.

"It seems to be an unlikely scenario, but if we assume that some external shock occurs - a decline in oil prices, unexpected sanctions, a too strong weakening of the ruble - under these conditions, the Central Bank may even raise the rate," the advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house stressed.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, agreed with Hestanov. "It seems to me that the Central Bank has no reason to act differently than keep the key rate unchanged. There are no major changes in inflation. There is not even a formal reason to cut the key rate," he said in the first place.

"Sooner or later, the Central Bank will be forced to cut the key rate, but it will do it slow. I think that at the end of the year we will face a rather low economic growth rate. Most likely, the events will follow this scenario in the second half of the year," Alexander Abramov expects.