Central Bank said the reasons for too low inflation

Central Bank said the reasons for too low inflation


The level of monthly inflation based on the year in February was “very low”, said the Central Bank in response to the request , without naming specific figures. We are talking about analizirovali inflation (current monthly price growth, adjusted for seasonality and extrapolated for the next 12 months). “However, this calculation does not allow to draw conclusions about future inflation dynamics and illustrates the current price dynamics,” said the regulator.

Too low inflation in February last week drew the attention of Sberbank CIB. As previously reported, the Bank also plans to achieve a target inflation rate of 4% by the end of the year, but economists expect price increases, according to weekly statistics released by Rosstat (the month the Agency has not yet published), has slowed down to the level below this level, the analysts wrote. The reason of such dynamics, in their opinion, too weak demand, which in January continued to watch for several months decrease (the data for February is also not yet published).

Inflation below expectations

Based on weekly statistics, the Central Bank estimates the February inflation at 4.6–4.7 percent year-on-year, said the regulator, acknowledging that the slowdown in prices has exceeded expectations. For this there are two reasons, said CB: “the First is the base effect: monthly inflation this year is less than in the corresponding months of last year, since the beginning of last year the weakening of the ruble has accelerated the growth of prices. This effect is almost exhausted. The second reason is time factors: the strengthening of the ruble and a good harvest last year. Also the restraining influence continues to have weak demand, including a high propensity for savings, supported by a moderately tight monetary policy”.

Inflation is 2% annually, according to the IMF, is considered low and “may be more dangerous than high because it can turn into deflation, reliable recipes fight”, as mentioned in the review of Sberbank CIB. The gap between nominal rates and the key rate of the Central Bank continues to increase, and over time it “can have a negative impact on the recovery of economic growth,” said the chief economist of the Eurasian development Bank Yaroslav Lissovolik.

However, in the national economy “is strengthening of the positive trends exceed the expectations of the Bank of Russia”, — said in the review “what do the trends”, Department of studies and forecasting of the Central Bank showed Monday. Analysts, the Central Bank said “sustainable positive dynamics” in economic activity, which contributes to restoration of growth.

Photo: Mikhail Mordasov / RIA Novosti

By the end of 2016, prices in Russia grew by 5.4% — the lowest figure in the recent history of the country. Growth prevent too high inflation, while slow growth of prices “is not harmful and does not help economic growth”, said in January the head of the Department of monetary policy of the Central Bank Igor Dmitriev.

The controller can drop a target for inflation below 4%, stated in the beginning of the year, first Deputy Chairman of the Central Bank Ksenia Yudaeva. However, on Monday, the regulator said that inflation expectations in 12 months (by which the Central Bank traditionally focused when deciding on the rate) in February, stopped falling. Compared with December, they increased by 1.4 percentage points to 12.9%. At the same time “sentiment of the respondents remain more positive than the average for 2016,” noted the regulator.

Risk of a decline in the annual inflation rate below 4% “quite remarkable,” says chief economist at ING in Russia and CIS Dmitry Field. This level can be achieved in the third quarter, and then by the end of this year or early next year inflation will be even less. But this difference of “several percent” does not play an important role due to long-term plans of the Central Bank to rein in inflation, he said.

What will happen to the key rate

Analizirana inflation “is taken into account by the [Bank] and is one of the key short-term indicators when making decisions [at the rate],” says Lissovolik. It is “one of subsidiary performance,” adds chief economist of “Renaissance Capital” in Russia and the CIS Oleg Kuzmin. According to both analysts, is to rely primarily on inflation expectations. Assessment Kuzmin, at the end of the year inflation will be 4.7%. Analysts of the Central Bank on Monday said that the consensus forecast for growth of prices at the year end was 4.3%. “This contributed to a more favorable-than-expected inflation in the first quarter and expectations of continued moderately tight monetary policy by the Bank of Russia”, — said in the review of the Central Bank.

Deciding on the key rate, it is necessary to proceed not from the current inflation and the forecast of the level, confirmed by the Central Bank . The slower price growth in February — “definitely, a positive message,” and in these circumstances, the potential reduction in the key rate in the first half saved, added the regulator. In early February, the Central Bank made more stringent comment on rates, saying that its reduction potential has decreased due to changing external and internal conditions. Since February, the Treasury began to buy foreign currency on the open market due to the oil windfall of the budget, formed as a result of the increase in the price of oil over $40 (level, included in the budget). The purpose of the actions of the Ministry — the dependence of the ruble on the oil price.

The Central Bank keeps the rate at 10% since September 19, 2016. Rate, based on inflation in February, may decline in the second quarter of this year, suggests Lissovolik. In his opinion, in the first half of it will be reduced by 0.5 percentage points, and by the end of the year on 1,5–2 percentage points (last year, a decline of 1 percentage point). Kuzmin less optimistic — he expects to reduce by 1-1. 5 percentage points of the Consensus forecast calls for a rate reduction to 8.5% in 2017, the authors of the survey “what do the trends”, although back in January it was 8%.

The Central Bank has no plans to lower the rate so as not to undermine the confidence of investors, explained Igor Dmitriev. “The economy will grow faster, but it will not rise above a certain level. Then again we’ll hit the ceiling,” he said. The baseline scenario of the Central Bank presumes inflation at 4% until at least 2019, follows from the Basic directions of monetary policy for the next three years. This strategy, according to the plan of the Central Bank, will affect the behavior of the population, says Field. Savings model the behavior of the citizens will continue to work, consumption “will be reasonable and calm,” he said. “It is the goal of the Central Bank — to achieve a balance between model savings and some increase in consumption, which does not bear additional inflation risks,” concludes the analyst.

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