Central Bank said the reasons for the reduction of the key rate

The first factor, which noted the Central Bank in the official press release about the reduction of the key rate, it is confidence in the sustainable reduction of inflation. “The pace of growth of consumer prices was lower than predicted. Annual inflation stabilized at 7.3%, monthly inflation seasonally adjusted, in annual terms — about 5%”, — stated in the message. Improvement in economic activity is no pressure on consumer prices and inflationary expectations of the population and business continue to decline, adds the Central Bank.

Better than expected and the situation on world commodity markets, adds Central Bank. This has contributed to reducing inflation through the dynamics of the ruble exchange rate and food prices. Another positive factor for inflation regulated prices and tariffs will be indexed in July, not as much as a year ago.

“In the future, the growth rate of consumer prices will continue to decline, primarily under the influence of constraints on the demand side. The Bank of Russia lowered the forecast of inflation by the end of 2016 to 5-6%,” says CB.

Another important factor that the Central Bank considered in its positive trends in the economy are not accompanied by growing inflationary pressures. Data on GDP dynamics in the I quarter of 2016, as well as macroeconomic indicators for April confirm the increased stability of the Russian economy to fluctuations in oil prices. Continues the development of processes of import substitution and expansion of non-oil exports, there has been an additional area of growth in industrial production”, — the Chairman of the Central Bank. However, the negative dynamics of investments, stagnating for quite a wide range of industries, including those that have traditionally been sources of Russian economic growth. “However, positive developments in the economy and expedite its entry into the recovery phase — the quarterly GDP growth is expected no later than the second semester of the current year”, — stated in the message. The Central Bank predicts GDP growth of 1.3% in 2017 with an average annual oil price of about $40 per barrel in the next three years.

Monetary conditions will remain moderately hard, said the Central Bank. Real interest rates in the economy (including inflation expectations) will remain at a level which would encourage savings and to meet the demand for credit not leading to an increase in inflationary pressures. To continue to control interest rates in the economy and during the transition to the surplus liquidity in the banking sector, the Central Bank is ready to use “the necessary set of instruments to absorb liquidity”, the report says.

The Bank of Russia notes that the risk that inflation will not reach the target level of 4% in 2017, declined, but remain at an elevated level.” This is due primarily to the inertia of inflationary expectations, the lack of medium-term strategy of fiscal consolidation, uncertainty of parameters for further indexation of salaries and pensions,” says CB. A negative impact on inflation expectations may have on the volatility of the oil and financial markets. Realization of these risks may cause slowing of the process of reducing inflation, summarizes the Central Bank.

On Friday, the Bank of Russia lowered the key rate by 0.5 percentage points to 10.5% per annum. The rate reduction was the first since the summer of 2015.