The Bank of Russia raises the key rate by 0.25 pp to 7.75% p.a.
On 14 December 2018, the Bank of Russia Board of Directors decided to raise the key rate by 0.25 pp to 7.75% per annum. The decision taken is proactive in nature and is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon. There presists uncertainty over future external conditions, as well as over the reaction of prices and inflation expectations to the upcoming VAT rate increase. The increase in the key rate will help prevent firm inflation anchoring at the level significantly exceeding the Bank of Russia’s target. Taking into account the decision taken, the Bank of Russia forecasts annual inflation to be
Inflation dynamics. At the end of 2018, inflation is expected to be close to 4%, which corresponds to the Bank of Russia’s target. In November, the annual consumer price growth rose to 3.8% (3.9%, according to the estimates as of 10 December). This November’s upward movement of inflation was largely driven by annual food price growth accelerating from 2.7% to 3.5%. This was supported by changes in the balance of supply and demand in certain food markets. Prices are further adjusting to the ruble exchange rate that has weakened since the beginning of the year. Consumer price growth is starting to be affected by the VAT increase scheduled to take effect from 1 January 2019. According to Bank of Russia estimates, most inflation indicators reflecting the most sustainable price movements are growing.
The price expectations of businesses increased, triggered by the weakening of the ruble which took place since the beginning of the year and the forthcoming VAT rise. Household inflation expectations rose in November. Uncertainty persists over their subsequent movements.
The situation in the domestic financial market remained stable in November and the first half of December and did not pose any additional inflation risks.
The Bank of Russia’s forecast assumes consumer price growth rate at
Monetary conditions. A certain tightening in monetary conditions is still ongoing. OFZ yields remain markedly above this year’s Q1 readings. A further rise in interest rates is progressing in the deposit and credit market. The increase in the key rate by the Bank of Russia will help maintain real interest rates on deposits in the positive territory, which will support the attractiveness of savings and balanced growth in consumption.
Economic activity. Russian economic growth slowed down slightly, remaining close to its potential. In 2018 Q3, annual GDP growth slipped to 1.5%, consistent with the Bank of Russia’s forecast, mostly due to the high base effect in agriculture. Industrial output continued its annual growth in October with sectoral trends remaining mixed. Consumer demand growth slowed down, as compared to previous months. Its expansion is largely based on the non-food sales. Investment activity continued to rise in the third quarter. The Bank of Russia keeps unchanged its 2018 annual GDP growth forecast of
The Bank of Russia’s view of the Russian economy’s
Inflation risks. The balance of risks remains skewed towards pro-inflationary risks, especially over a short-term horizon. High uncertainty over future external conditions and their impact on financial asset prices still remains. In the fourth quarter, oil prices remain above 55 US dollars per barrel included in the baseline scenario assumptions for
Potential capital outflow from emerging markets coupled by geopolitical factors might enhance volatility in financial markets and affect exchange rate and inflation expectations.
There presists uncertainty over the reaction of prices and inflation expectations to the upcoming VAT rate increase and to the influence of other proinflationary factors.
The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements, possible changes in consumer behaviour and budget expenditures. These risks remain moderate.
The Bank of Russia will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 8 February 2018. The Board decision press release is to be published at 13:30 Moscow time.
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