Bank of Russia decided to keep the key rate at 11.00%

On 11 December 2015, the Bank of Russia Board of Directors decided to keep the key rate at 11.00 percent per annum, in recognition of growing inflation risks, while the risks of economic cooling remain. The annual pace of consumer price growth in the end of 2016 is estimated to be about 6%, on the way to reach the target of 4% in 2017. As inflation slows down in line with the forecast and on condition inflation risks recede, the Bank of Russia will continue with a downward revision of its key rate, to be decided at one of its forthcoming Board of Directors meetings.

In the November to early December 2015 period, inflation slowdown continued. The Bank of Russia estimates the annual growth pace of consumer prices to total 14.8% as of 7 December, on 15.6% in October. Seasonally adjusted monthly inflation was down from 0.9% between August and October to 0.7% in November. Consumer prices were rising slower thanks to the beneficial agricultural environment and a gradual exhaustion of the impact from the depreciation of the ruble of the July to August period, as well the weakness in consumer demand driven by low growth in nominal household incomes. The downturn in annual inflation is further explained by the sharp increase in consumer prices seen one year ago (the base effect). However, the slowdown in consumer prices occurred somewhat slower than predicted. In addition, inflation expectations of households escalated in November, although projected to decrease.

The restraining pressure on prices also comes from the moderately tight monetary conditions. Money supply (M2) growth rates increased but still remain low. The downward trend in lending and deposit rates, driven by the Bank of Russia’s previous key rate reductions, has slowed down. Deposit and lending rates remain at the level which, on the one hand, serves to keep ruble savings attractive and, on the other hand, along with high debt burden and tightened creditworthiness requirements, is a factor behind low annual lending expansion.

According to Rosstat’s tentative estimates, the annual pace of GDP drop decreased in Q3. Having said this, the mixed dynamics seen in core macroeconomic indicators for October speak for instability of this trend. While industrial output and investment contracted at a slower pace than before, contraction in consumer demand accelerated. As demographic conditions remain negative, unemployment was still low; the labour market was adjusting to the new conditions largely through declining real wages and wider part-time employment.

The current trends are expected to persist in the coming months. The modest growth of household income and retail lending will continue to contain consumer spending. Investment activity will remain weak amid the persisting economic uncertainty and the relatively tough lending conditions. Investment demand is expected to be constrained also by limited potential substitution of external finance with domestic one, following the narrow nature of the Russian financial market and high debt load of companies. Investment is likely to be supported somewhat by the governmental turnaround programme. In an unfavourable environment in the global commodity markets, exports in value terms are expected to go down. At the same time a weaker internal demand will cause a more significant decrease in imports in value terms. As a result, net exports will be a positive contributor to the annual output growth.

Further economic development will depend on the pace of the economy’s adjustment to the recent external shocks. According to the Bank of Russia’s forecast, gradual easing of internal financial conditions, lower debt burden and improved business sentiment in 2016 H2 will pave the way for investment and production recovery in 2017. It will consequently result in growing household income contributing to the revival of consumer demand in 2018. The GDP fall will slow to 0.5-1.0% in 2016. In 2017, the economic growth rate will stand at 0.0-1.0%.

The annual inflation will drop in early 2016 following its high value in early 2015, among other things. The external trade restrictions imposed against Turkey from January 2016 will not have a significant impact on consumer prices. These restrictions are estimated to add about 0.2-0.4 pp to inflation till the end of 2015 and in early 2016. The slack domestic demand and the relatively tough monetary conditions will drag down annual inflation in 2016-2017. A slowdown in the consumer price growth will create prerequisites for decrease in inflation expectations. According to the Bank of Russia’s forecast, the annual consumer price growth will stand at about 6% in late 2016, on track to reach the 4% target in 2017, facilitated by the current monetary policy.

The key sources of inflation risks are possible further worsening of the external climate against the backdrop of persistently low oil prices, monetary policy normalisation by key central banks and continued slowdown in the Chinese economic growth. Besides, inflation reduction can be hampered by persistently high inflation expectations, and an upward revision, planned for 2016-2017, of rates and prices in the regulated sector, an upward revision of social payments indexation, as well as overall budget policy easing.

As inflation slows down in line with the forecast and provided that inflation risks recede, the Bank of Russia will continue with a downward revision of its key rate, to be decided at one of its forthcoming Board of Directors meetings.

The Bank of Russia will hold its next rate review meeting on 29 January 2016. The press release on the Bank of Russia Board of Directors’ decision is to be published at 13:30 Moscow time.

Interest rates on the Bank of Russia major operations¹

(% p.a.)

^I Information on interest rates on the Bank of Russia operations is given in the Table ‘Interest rates on the Bank of Russia operations’.

² Floating interest rate linked to the level of the Bank of Russia key rate.

³ Fine-tuning operations.

Information notice ‘On the procedure for conducting fine-tuning operations’.

Information notice ‘On fine-tuning operations to absorb liquidity’.

⁴ Until 31.12.2015.

Starting from 01 January 2016 the refinancing rate was set equal to the Bank of Russia key rate set as of the respective date. Starting from 1 January 2016, the independent value of the refinancing rate will not be set.

Refinancing rate values prior to 01.01.2016.

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