The Central Bank explained the reduction of the key rate to 9.25%


The Board of Directors of the Bank adopted on 28 April, the decision to reduce the key rate by 0.5 percentage points to 9.25%. The Bank of Russia explains the decision to several factors, including the approximation of inflation to the target level and maintaining savings behavior of Russians.

Stable inflation

Now the annual inflation approached the target level — on 24 April it was 4.2 and 4.3%, is spoken in the message of the Central Bank. “A significant contribution to the slowdown in inflation has made the strengthening of the ruble against the background of relatively high oil prices, maintaining the interests of foreign investors in Russian assets, as well as reducing the country risk premium,” explains Dr. Bank. Figures of monthly inflation with the exception of seasonality in February and March remained at a low level.

Also, the Central Bank noted a significant decline in inflation expectations of households and businesses in the first quarter of 2017. “However, this trend may be temporarily suspended on the back of the seasonal rise of food inflation, which is sensitive to the dynamics of inflation expectations,” warns the Central Bank. Model the savings behavior of households remains, but there are signs of revival of consumer activity. Since real disposable incomes are growing weak and consumer spending will recover only gradually, and inflationary risks it assumes is allowed to reduce the key rate by half a point.

A source of inflationary risks in the near future may become possible is that the volatility in world commodity and financial markets, according to the Central Bank. However, reduction in medium-term inflation risks will contribute to the legislative consolidation of the budget rule, which is intended to restrict the expenditure of oil and gas windfall.

“The Bank of Russia should continue to carefully assess all risks, as its main purpose is not the level of inflation this year and long-term price stability, the predictability of inflation dynamics for the population and business”, — said the Minister of economic development Maxim Oreshkin through the press service.

Monetary conditions

CB reiterated that to maintain the propensity to save and the trend to sustainable slowdown of inflation is necessary to maintain a “moderately tight” monetary conditions. After the reduction of nominal interest rates 0.5 PP positive real rates remain at the level which provides the demand for credit, but does not increase the pressure of inflation, says the Central Bank.

According to Bank of Russia estimates, the economic recovery in the first quarter continued, the expected increase in capital investment. “A positive dynamics of industrial production, a decrease in unemployment. The labour market adjusts to new economic conditions when signs of shortages in certain segments. Recovery processes become more homogeneous across regions,” notes the regulator.

In the future the Bank of Russia, taking the decision on the key rate, will estimate the ratio of probability of implementation of the baseline scenario (crude oil prices average $40 per barrel) and a scenario with rising oil prices, but also the future dynamics of inflation and economic development in relation to the forecast. The estimate by the Bank of Russia of a possible scale reduction of the key rate until the end of 2017 has not changed.

Oreshkin said through his press service that he expects to continue easing monetary conditions in the coming months as the channel of real interest rates and via the exchange rate.

The market reaction

As said the Deputy Director of the center for macroeconomic forecasting and investment strategy of the Bank Natalia Shilova, at this meeting, the Bank of Russia took less than expected for market participants, solution. “This decision was made despite the acceleration of inflation for the week ended April 24, from 0.1 to 0.2%. Additionally, the local weakening of the Russian currency this week is not confused regulator,” — emphasizes Shilov.

“The Bank of Russia, previously lived in a scenario of $40 a barrel, in its press release pointed out that now consider a scenario with rising oil prices. Accordingly, he suggests a more stable market situation and the possibility of more aggressive rate cuts than in the baseline scenario”, — said Shilov.

Chief economist for Russia and CIS “Renaissance Capital” Oleg Kuzmin said that the decision of the Bank of Russia exceeded the expectations of the investment Bank, which is expected to decrease by 0.25 percentage points “In our view, the decision to lower the rate by 0.5 percentage points due to fears of inflation fell below target at year end and the formation of bubbles on the Russian market of financial assets. Also plays a role and possible revision of the realization of more optimistic scenarios for oil prices,” the economist enumerates.

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