Russian Central Bank cuts key rate to 9%

Russian Central Bank cuts key rate to 9%

The board of directors of Russia’s Central Bank has decided to cut its key interest rate to 9.00% per annum.

"The Board notes that inflation is close to the target, inflation expectations keep declining, and economic activity is recovering. Inflation risks were down in the short term, while they remain in place in the medium term. The Bank of Russia will continue to conduct moderately tight monetary policy to maintain inflation close to the 4% target," the regulator said.

The report added that there is a room for cutting the key rate in the second half of 2017. While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.

"While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast," the report said.

Russia’s Central Bank has upgraded its GDP growth outlook for this year to 1.3-1.8% from 1-1.5%, the regulator said.

"Economic activity continues to recover. Household consumption is on the rise alongside with the growth in investment and industrial output. Currently, a moderate growth in consumer expenditures does not exert any inflationary pressure under increased supply of goods and services. Considering the current recovery trends, the Bank of Russia has increased its GDP growth rate forecast to 1.3-1.8% in 2017," the report said.

Economic growth is getting closer to its potential level, the regulator said. "The situation in the labor market with the shortage of personnel in certain segments being evident is a constraint. In the sequel a GDP growth rate higher than 1.5-2% annually will be reached if structural reforms take place," the Central Bank said.

"Consumption recovery is not outpacing growth in wages for the time being. Banks continue to adhere to a conservative policy by mitigating price and non-price lending conditions primarily for reliable borrowers. The slowing growth in household deposits was attributable in part to the deposit rate reduction. The Bank of Russia will set the monetary conditions to promote savings, which in turn will curb inflation risks," the regulator said.

"Short-term inflation risks connected with oil price dynamics have declined following the prolongation of the agreement to reduce oil production by oil-exporting countries," the report said. "At the same time short-term risks arising from the implied harvest, its impact on consumer goods prices and inflation expectations are typical of this season."

The next meeting of the board of directors of Russia’s Central Bank in 2017 is scheduled for July 28.

The Central Bank's decision to cut the rate is caused, first of all, by the expected drop in inflation, the advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov explained, speaking to Vestnik Kavkaza. "But on the other hand, the regulator's tradition is the slow change in the main parameters in monetary policy. That is why the decline was minimal." Most likely, if low inflation persists, after some time the Central Bank will consider other possibilities to continue reducing the key rate," the expert expects.

According to him, at the moment, changes in the key rate have no direct impact on the credit market. "It's good that the rate is being cut, but now the value of money in the money market, in the bond market, repo, interbank loans is significantly lower than the Bank of Russia's rate," the advisor on macroeconomics recalled.

Thus, according to Hestanov, the key rate of 9% per annum does not slow down the development of business. He suggested that if inflation remains at about 4% in the future, the key rate will gradually move to about the same values.

A professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, on the contrary, expressed the opinion that the Bank of Russia's decision was purely symbolic. "I think the Central Bank could have cut the rate lower. But they are afraid that everyone will raise money from the Central Bank's deposits and take them to the foreign exchange market .So this decision was made under the pressure of public opinion," he noted.

According to the expert, such a decision serves rather as a negative signal for business: it says that the rate will be cut very slowly.

The expert said that the ideal key rate  should be calculated by the formula "plus 1% to inflation." "Current inflation is 4.1% - respectively, we would get about 5%," Alexander Abramov said.