Russian Central Bank slows down key rate reduction

Russian Central Bank slows down key rate reduction

The Board of Directors of the Russian Central Bank has decided to keep the key rate at 10.5% per annum at the today's meeting.

"The decision and further tight monetary policy will contribute to achieving the inflation target of 4% by the end of 2017," TASS cited the press service of the bank as saying.

The Bank of Russia will consider further opportunities for cutting the key rate, taking inflation risks into account.

The press service of the bank explained that the dynamics of the inflation and emerging revival of economic activity generally correspond to the baseline forecast of the Central Bank. The monetary conditions will remain difficult. "Real interest rates in the economy, with inflation expectations factored in, will stay at a level which guarantees credit demand while not increasing inflationary pressure, and maintaining stimulus for saving," the statement says.

The annual rate consumer prices growth will be less than 5% in July 2017 and will reach the target level of 4% at the end of 2017. At the same time, according to the Bank of Russia, the annual rate of consumer prices growth as of July 25 fell to 7.2%.

The regulator also notes that the risks of inflation not reaching the target level of 4% in 2017 remain. "Coupled with external risks, this is mainly due to ongoing inflation expectations, uncertainty in specific measures of the budget consolidation, including pensions and salary hikes adjusted to inflation," the message notes.

An associate professor of Stock Markets and Financial Engineering of RANEPA, Vasiliy Yakimkin, speaking with a correspondent of Vestnik Kavkaza, said that the Central Bank's decision not to change the key rate fully meets today's realities.

"The ruble is falling, the dollar is growing, this is the inflation threat. That is why the Central Bank had to protect the ruble a bit, and it protected it," the expert explained.

He also reminded that the chairperson of Russia’s Central Bank Elvira Nabiullina said at the June meeting of the Board of Directors that it is not the beginning of a cycle of the key rate decline. "It was a hint that there will be no decline at the current session," the associate professor of Stock Markets and Financial Engineering of RANEPA said.

"However, it is summer when food products are rather cheap. We will see what happens in autumn, when the Central Bank considers in more detail," the expert noted.

According to Yakimkin, in September, the Bank of Russia will decide on the key rate, taking the oil prices into account. "If oil prices are low and the pressure on the ruble continues, of course, the Central Bank will not increase this pressure, therefore, the rate will not be reduced," he explained.

By the end of this year, the situation will be somewhat different. "By December, when they receive all inflation data for a year, if inflation is less than 7% per annum, they will have to raise the key rate to this level," Vasily Yakimkin concluded.

The Chairman of the Board of the National Currency Association (NCA), Dmitry Piskulov, also described the Central Bank's decision as a justifiable one. "The macroeconomic indicators offer no ground for further decline yet. Last time the key rate was reduced, but now the regulator is waiting," he said.

"The main factors which worry the Bank of Russia is possible reduction in oil prices and volatility in the foreign exchange market. As for the macroeconomic indicators, despite an improvement, (that is the inflation is declining), it is rather a seasonal factor. The industrial production growth is not as obvious as we would expect," the expert complained.

Piskulov stressed that the sharp decline in the rate is unprofitable for the regulator, because "it makes rubles, which can be used on the exchange market, cheaper." "Of course, the Central Bank does not regulate the exchange rate, but, nevertheless, it is monitoring the situation and indirectly draws attention to this factor," the Chairman of the Board of the National Currency Association explained.

According to him, the growth of the uncertainty in the US dollar interest rate, "lead the Bank of Russia to refrain from further decline and helps to keep the rate at this level, despite the fact that the annual inflation is already below 10%."

"I think that the Bank of Russia will revert to the possibility of lowering the rate after it achieves a steady GDP growth, as well as a significant decrease in devaluation expectations," Dmitry Piskulov concluded.


Vestnik Kavkaza

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