The Central Bank prepared for a new drop in oil prices

Friday, March 18, the Board of Directors of the Bank of Russia kept its key rate unchanged at 11% per annum. From the official reports of the Central Bank that the regulator expects a reduction in oil prices.

Due to the slowdown of the Chinese economy, the expansion of oil supplies from Iran and increased competition in the oil market has been oversupply, specifies the Central Bank. “Therefore, some recovery in oil prices in recent weeks may not be sustainable,” — said in the message. The Bank of Russia laid down in the updated baseline scenario of the forecast average oil price of $30 per barrel in 2016 and gradually increase to $40 per barrel by 2018. Based on such forecast of oil prices, the Central Bank decided to keep key rate at 11% per annum.

The rise in oil prices since mid February. On Friday, March 18, a barrel of Brent crude oil cost $41,9.

However, this increase in oil prices failed to offset the accumulated depreciation of the rouble, which occurred under the influence of falling oil prices in late 2015 — early 2016, indicates the Central Bank. Therefore, inflationary pressure continues to persist. Although the inflation slows down.

According to Bank of Russia estimates, the annual growth rate of consumer prices fell from 9.8% in January 2016 to 7.9% as of 14 March 2016. This is lower than the inflation forecast for the year ahead, published by the Bank of Russia in a press release in March 2015 (about 9%). Weak demand and a gradual decline in inflation expectations will contribute to reducing inflation. According to the forecast of Bank of Russia, annual inflation will be less than 6% in March 2017 and will reach the target level of 4% at the end of 2017.

In addition, the rate decision was influenced by the uncertainty regarding some parameters of the budget, said the Central Bank. The government’s decision regarding the indexation of salaries and pensions will affect inflation.

Also accepting the decision of the Central Bank took into account that the dynamics of the main macroeconomic indicators showed a smaller contraction than previously estimated with the high level of oil prices. “Floating exchange rates partially offset the adverse impact of external shocks on the economy. The weakening of the ruble led to the growth of competitiveness of Russian goods and contributed to economic growth in some sectors. Among them: agriculture, food, chemical and mining industry”, — stated in the message of the Central Bank.

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The economy will continue to adjust to low oil prices, says the Central Bank. According to the forecast of Bank of Russia, in 2016 the downturn in the economy will slow to 1.3-1.5%. At the end of 2016 — early 2017 quarterly GDP growth rates will become positive.

The CBR noted that inflation may increase at the end of 2017. This may be due to a possible deterioration in the oil market and long-term preservation of high inflationary expectations. In addition, inflation can be affected by changes in the rate of indexation of tariffs, salaries and pensions, as well as uncertainty about the Federal budget balance. The Bank of Russia can conduct a moderately tight monetary policy for longer than previously thought, the report said the Central Bank.