On 25 July 2014 the Bank of Russia Board of Directors decided to raise the the Bank of Russia key rate to 8.0 percent per annum. Inflation deceleration in July 2014 has been slower than expected. At the same time, inflation risks have increased due to a combination of factors, including, inter alia, the aggravation of geopolitical tension and its potential impact on the ruble exchange rate dynamics, as well as potential changes in tax and tariff policy. The build-up of these risks will lead to inflation expectations remaining heightened and creates threats of inflation exceeding the target in the coming years. The adopted decision is aimed at slowing the consumer price growth to the 4.0% target level in the medium term. If high inflation risks persist, the Bank of Russia will continue raising the key rate.
In June 2014, the year-on-year consumer price growth rate increased to 7.8% and core inflation grew to 7.5%. Meanwhile, inflation expectations stayed elevated. The main reason for inflation acceleration was the effect of the observed ruble depreciation on prices of a wide range of goods and services. Moreover, there were a number of specific factors boosting prices for some food items. July has seen signs of inflation slowdown. However, deceleration in consumer price growth has been slower than expected. The annual consumer price growth rate stood at estimated 7.5% as of 21 July. Inflation deceleration was mainly caused by lower increases in administered prices and utility tariffs. Price growth rates for other goods and services have stabilised as a result of decreasing impact of ruble depreciation seen in January-March 2014 on consumer prices, along with improved conditions in food markets due to, inter alia, the new harvest coming in.
Monetary conditions have been tightening since March 2014, inter alia due to geopolitical factors. Interest rates on bank loans and ruble deposits increased. Lending growth slowed down slightly following the acceleration in the previous months. The year-on-year money supply growth rate has decreased which sets conditions for a decline in inflation in the medium term.
Over Q2 2014 the moderate recovery of economic activity has been observed. According to the Bank of Russia estimates, the GDP growth rate was close to zero in Q2 following negative figures earlier. Low economic growth rates are largely caused by structural factors. Utilisation of production factors — labor force and commercially viable production capacities — is high. Labour productivity growth is sluggish. Due to the demographic trends labour force shortage will continue to affect economic growth in the long term. Along with structural factors, external political uncertainty has a negative impact on economic activity. Investment demand remains weak amid low business confidence, limited access to long-term financing in both international and domestic markets, and declining profits in the real sector. Besides, consumer activity is cooling. Economic slack in most countries that are Russia’s trading partners does not contribute to acceleration in economic growth. At the same time, persistently high oil prices support domestic economy.
Under the scenario of no negative shocks, annual inflation will decline in the second half of 2014. The factors of inflation decline are exhausted impact of ruble depreciation seen in January-March 2014 on consumer prices, lower scale of increase in administered prices and tariffs, expected good harvest, as well as subdued aggregate demand with aggregate output of goods and services remaining below potential. At the same time, there is an increased probability of negative trends which may result in inflation acceleration. These shocks include aggravation of geopolitical tension, adjustments in monetary policy of foreign central banks and the potential impact of those factors on national currency exchange rate dynamics, tax and tariff policy changes under discussion. Against this background the adopted decision will set conditions for a decline in annual consumer price growth rates to 6.0-6.5% by the end of 2014 and to the target level of 4.0% in the medium term. If high inflation risks persist, the Bank of Russia will continue raising the key rate.
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 12 September 2014. 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
||Type of instrument
||Standing facilities (fixed interest rates)
Loans secured by gold1;
Loans secured by non-marketable assets and guarantees1;
FX swaps (ruble leg)
|Open market operations (minimum interest rates)
||Loans secured by non-marketable assets, auctions2
||from 1 to 6 days3, 1 week
||Open market operations (maximum interest rates)
||from 1 to 6 days3, 1 week
|Standing facilities (fixed interest rates)
1 Complete 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’.