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On Bank of Russia key rate

16 June 2014
Press release

On 16 June 2014 the Bank of Russia Board of Directors decided to maintain the Bank of Russia key rate at 7.5 percent per annum.In case existing inflation risks materialise, and threats to medium-term inflation targets emerge, the Bank of Russia will continue increasing the key rate.Significant inflation acceleration in February‑May 2014 was prompted by a number of unforeseen factors, i.e. the considerable impact of exchange rate dynamics on consumer prices, as well as unfavourable conditions in the markets for some goods. Taking into account that monetary policy influence on the economy is distributed over time, inflation slowing to the 5.0% target in 2014 is unlikely. However, maintaining current monetary policy stance will ensure a slowdown in consumer price inflation to the target levels in the medium term.

The annual rate of consumer price growth is estimated at 7.6% as of 9 June 2014. Core inflation increased to 7.0% in May 2014. The main reason for inflation acceleration is the effect of the observed rouble depreciation on prices of a wide range of goods and services. Moreover, there were a number of specific factors affecting the markets for some food items and boosting their prices. Against this backdrop, household inflation expectations rose, which also had an impact on consumer prices.

So far the rise of the Bank of Russia key rate has had a small effect on bank lending and deposit rates, as well as on volumes of these operations. In March‑April lending and rouble deposit rates slightly increased. However, rouble deposit growth rates continued to decline while lending growth rates, in contrast, kept increasing.

The ongoing economic slowdown does not have a considerable restraining effect on consumer price growth since it is caused largely by structural factors. Historically low unemployment rate constrains economic growth potential. Due to demographic trends the impact of this factor will persist in the long run. Utilisation of commercially viable production capacity remains high. Labour productivity growth is sluggish, while fixed capital investment continues to contract because of declining profits in the real sector, limited access to long-term financing in both international and domestic markets, as well as low producer and consumer confidence. Uncertainty about international political situation also hampers production and investment. Besides, weak economic activity in most countries, which are Russia’s trading partners, restrains the economic growth in Russia. At the same time, persistently high oil prices have a stabilising effect on the domestic economy and public finance. Consumer demand remains the main driver of economic growth. However, in April there were some signals of its decline following a temporary increase in previous months on the back of price growth expectations.

According to the Bank of Russia projections, in 2014 economic growth will slow down to 0.4%. Boost to economy from the observed rouble depreciation will be limited. Amid economic uncertainty and declining producer confidence this year there is a high probability of a reduction in fixed capital investment. The combination of slowdown in real wages growth and a decline in household lending growth rates will have a dampening effect on consumer activity. Net exports will make a positive contribution to economic growth. In the second half of 2014, economic growth is expected to accelerate slightly against the backdrop of alleviated geopolitical tension and improving producer sentiment.

Rouble depreciation in late 2013 — early 2014 will continue affecting consumer prices in the coming months. Nevertheless, given the stabilisation in the foreign exchange market in April — early June 2014, the contribution of exchange rate dynamics to inflation will decline. In the second half of the year, lower planned increases in administered prices and tariffs, low demand pressure due to the aggregate output of goods and services remaining below potential, as well as good expected harvest will also facilitate a slowdown in consumer price growth. In turn, lower inflation will contribute to a decline in inflation expectations. Taking into account that the observed acceleration in consumer price growth was prompted by unforeseen factors, while monetary policy influence on the economy is distributed over time, inflation slowing to the target level of 5.0% in 2014 is unlikely. However, maintaining current monetary policy stance will ensure a slowdown in consumer price inflation to the target levels in the medium term.

Still, the risk of inflation exceeding the target remains high not only in the short term but also in the medium term. That risk is related to rouble exchange rate dynamics affected by, inter alia, monetary policy measures of the foreign central banks and geopolitical situation. Other sources of risk are inflation expectations dynamics, conditions in the food commodities markets as well as a possible revision of planned changes in administered prices. If these risks materialise and it puts medium-term inflation targets under threat, the Bank of Russia will continue increasing the key rate.

The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 25 July 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

(% p.a.)

Purpose Type of instrument Instrument Term Rate since 28.04.14
Liquidity provision Standing facilities (fixed rates) REPO
Overnight loans
Lombard loans
Loans secured by gold
Loans secured by non-marketable assets and guarantees
FX swaps (rouble leg)
1 day 8.50
Open market operations (minimum interest rates) Loans secured by non-marketable assets, auctions2 3 months 7.75
REPO auctions from 1 to 6 days3, 1 week 7.50
(key rate)
Liquidity absorption Open market operations (maximum interest rates) Deposit auctions from 1 to 6 days3, 1 week
Standing facilities (fixed rates) Deposit operations 1 day, call 6.50
Memo item:
Refinancing rate 8.25

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 A 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”.

The reference to the Press Service is mandatory if you intend to use this material.