The Central Bank has named four reasons to maintain the key rate

On July 29, the Board of Directors of the CBR decided to keep key rate at the level of 10.50%, explaining their actions including suspension lowering inflation expectations. The Bank of Russia also noted that risks remain that inflation will not reach the target level of 4% in 2017. Explaining the decision, the Bank of Russia has led four arguments.

The Bank of Russia noted that overall inflation slowed down in accordance with the basic forecast of the regulator, aided by weak consumer demand, stability in the financial market, the indexation of tariffs. The Central Bank said reducing the growth rate of consumer prices to 7.2% 25 July 2016 and said that inflation will continue to slow in the first place under the influence of constraints on the demand side.

Second, it emphasizes the Central Bank, real interest rates in the economy will remain at a level that ensures that the demand for credit, which will not lead to inflationary pressure and will maintain incentives for savings. “To ensure operational control over the level and structure of market interest rates in terms of the planned transition to the surplus liquidity in the banking sector, the Bank of Russia will use the required set of instruments to absorb liquidity,” explains the regulator.

In addition, the Central Bank indicates that the recovery of industrial activity occurs on a background of weak demand and lead to growth of consumer prices. “There is still heterogeneity in economic dynamics across industries and regions. Continues the development of processes of import substitution and expansion of non-oil exports, there has been additional growth areas in the industry, including in the manufacturing sector. At the same time there is stagnation or decline in growth rates of output in selected industries continue to decline investments”, — is spoken in the message. Thus, according to the Central Bank, in General there is a trend of recovery in economic activity. Output annual GDP growth rate in the positive area is projected in 2017.

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Also, the report notes that due to inertia in inflation expectations and uncertainties regarding fiscal consolidation, risks remain that inflation will not reach the target level of 4% in 2017. “The trend towards higher wages and a reduction in Deposit rates can weaken the incentives of households to save. To reduce these risks it is necessary to maintain the Bank of Russia interest rates to stimulating savings”, — is spoken in the message.

The Bank of Russia will consider the possibility of further reduction of the key rate, assessing the risk of inflation and compliance with the dynamics of the deceleration of inflation forecast trajectory. The next meeting of the Board of Directors of the Bank of Russia, which will address the issue of the level of the key rate, scheduled for September 16, 2016.