Russian Central Bank symbolically cut its key rate

Russian Central Bank symbolically cut its key rate

The board of directors of Russia’s Central Bank has decided to cut its key interest rate for the first time since September 2016 by 25 basis points to 9.75% per annum.

"The Board of Directors notes that inflation slowdown overshoots the forecast, inflation expectations continue to decline and economic activity recovers. Inflation risks have slightly dropped but remain elevated," TASS cited the regulator as saying.

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

The bank said it would consider cutting rates further as inflation had slowed to a low of 4.3 percent in March. The central bank targets annual inflation at 4%.

"The Bank of Russia will assess further dynamics of inflation and the economy and admits the possibility of a gradual decline of the key rate in the second and third quarters of the current year," it said.

The central bank also said that the economic outlook had improved somewhat. It now sees gross domestic product growing 1-1.5% in 2017 compared with its previous forecast of GDP growth of less than 1%.

A professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking to Vestnik Kavkaza, noted that this rate cut is more psychological than really affecting the Russian economy. "The Central Bank had to react to the situation, because the inflation rate today is less than 4%. In such circumstances it is difficult to explain why the rate is kept at such a high level, but it cannot be sharply reduced, because there will be a significant risk of money leaving for the foreign exchange market, so the Central Bank preferred a symbolical rate cut," he said.

The economist explained that in theory, the annual inflation rate of 3.8% allows the rate cut up to 5%, but with high bank liquidity this is fraught with catastrophic consequences. "There are about 2.5-3 trillion rubles now at the Central Bank's correspondent accounts and deposits. And if sell one trillion rubles, it would be enough for the exchange rate to fly to completely uncontrolled heights. The central bank first needs to remove excess liquidity from the banking system, after which the rate will be reduced to 5%," the professor at the department of the stock market and investments at the Higher School of Economics noted.

"It will not have any noticeable effect on Russia's economy. The drop of 0.25% at a rate of 10% is just a declaration of intent to start a decline," Alexander Abramov concluded.

The head of the Regional Banking Association, the chairman of the Duma Committee on Economic Policy, Innovation and Entrepreneurship Development, Anatoly Aksakov, expressed hope that further reduction of the rate will be more substantial. "I welcome the overcoming of this psychological threshold of 10%. I hope the further move towards a reduction in the key rate will be more substantial, down to 7.5 - 8% by the end of the year," the deputy said.

"The Central Bank took a superconservative position in the conduct of monetary policy, apparently fearing for external factors. In particular, in the last days before the meeting of the Board of Directors of the Central Bank, there was a fairly significant decline in oil prices, which probably became the main reason for the cautious position of the Central Bank. I think that there are all the prerequisites for a more substantial reduction in the key rate: inflation below 5%, the exchange rate is stable, the situation in the financial markets is stable as well," Anatoly Aksakov stressed.

According to him, despite the insignificant decline in the key rate, one should expect the market's reaction to this event. "The market rates continue to focus on the key rate, although recently we have seen that interest rates of banks were declining because of the depletion of demand for expensive resources. There is also a problem of liquidity surplus, allowing credit organizations to earn money by placing their funds on Central Bank's deposits: Reduction of the rate will partially facilitate the choice of an alternative way of investing money in the economy," the head of the Regional Banking Association, the chairman of the Duma Committee on Economic Policy, Innovation and Entrepreneurship Development concluded.

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