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The Bank of Russia keeps its key rate at 9.00% p.a.

28 July 2017
Press release

On 28 July 2017, the Bank of Russia Board of Directors decided to keep the key rate at 9.00% per annum. The Board notes that inflation remains close to the target level, while economic recovery is continuing. At the same time, short-term and mid-term inflation risks persist. The decline of inflation expectations has come to a halt, consistent with predictions, in response to price movements in a number of products and services. In order to maintain inflation close to the 4% target, the Bank of Russia will continue to conduct moderately tight monetary policy.

The Bank of Russia sees room for cutting the key rate in the second half of 2017. While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.

In making its key rate decision, the Bank of Russia was guided by the following assumptions.

Inflation dynamics. Inflation remains close to the target. June saw a slight short-term rise in inflation to 4.4%, which came as a result of price movements in fruit and vegetables under the influence of bad weather conditions. At the same time, the trend towards sustainably low inflation remains in place. Growth rates of food product prices, but for fruit and vegetables, continued to slow, so did prices in the non-food product market and core inflation. Price growth rates continue to show consistency both across regions and in the consumer basket. This is reflected in the growing proportion of products and services posting price growth rates around 4%. In this environment, recovering consumer demand alongside the decline of its disinflationary effect brings no material risks. In the months ahead, as new harvest comes in, prices for fruit and vegetables are set to show a seasonal downward trend.

Consistent with expectations, the seasonal rise in prices on individual food products brought about a temporary halt in the decline of household and corporate inflation expectations. Their performance could also have been impacted by the traditional rise in regulated prices and tariffs.

The weakening of the ruble in June and July had no meaningful implications for annual inflation and inflation expectations, given its substantial strengthening observed since early this year. For inflation to become anchored close to the 4% target, sustainable decline in inflation expectations in required.

Monetary conditions. Monetary conditions are crucial in the efforts to bring about sustainably low inflation. They are adjusting to the key rate reduction. Interest rates on loans have declined but their level supports moderate demand for borrowing. Banks continue to adhere to a conservative policy by mitigating price and non-price lending conditions, primarily for reliable borrowers. The slowdown in the growth of household deposits mainly comes as a result of the declining paces of money supply growth, triggered by fiscal operations, rather than as a result of declining deposit rates. The Bank of Russia will continue to set such monetary conditions which will support the propensity to save and warrant balanced growth in consumption, thereby curbing inflation risks.

Economic activity. The economic activity is rebounding. Positive trends in industrial production are gaining momentum, freight turnover is growing, and construction has turned to recovery. Growth in household consumption expenditures went up along with the increase in investment and production. A moderate increase in consumer spending is not adding inflationary pressure as the supply of goods and services expands. Annual GDP is to grow by 1.3-1.8%.

At the same time, economic growth is nearing its potential level. It is constrained, among other things, by the situation in the labour market where shortages of labour force are already visible in some segments. Further GDP growth above 1.5-2% a year is attainable if structural reforms are put in place.

Inflation risks. Short-term inflation risks persist as regards harvest prospects and their impact on food prices and inflation expectations. Furthermore, volatility in global commodity and financial markets, as well as exchange rate dynamics amid elevated geopolitical risks may have negative implications for exchange rate and inflation expectations.

The sources of medium-term risks remain unchanged. First, they are connected with further movements of oil prices which are lower than expected in the light of the agreements achieved. Legislative consolidation and implementation of the budget rule will mitigate these risks. Second, growth in the productivity of labour may lag considerably behind the wage growth as structural shortage of labour force aggravates. Third, inflationary pressure may stem from changes in households’ behaviour as their propensity to save can become considerably lower. Fourth, inflation expectations remain sensitive to changing prices of individual groups of goods and services and exchange rate movements. Fifth, the likely tax manoeuvre may result in a temporary acceleration of inflation.

These factors call for moderately tight monetary conditions to remain in place for a long time for inflation to become anchored close to target.

While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.

The Bank of Russia Board of Directors will hold its next rate review meeting on 15 September 2017. The Board’s decision press release is to be published at 13:30 Moscow time.

Interest rates on the Bank of Russia major operations

(% p.a.)
Purpose Type of instrument Instrument Term Rate since 02.05.17 Rate since 19.06.17
Liquidity provision Standing facilities Overnight loans; FX swaps1; Lombard loans; REPO 1 day 10.25 10.00
Loans secured by gold2 1 day 10.25 10.00
from 2 to 549 days3 10.75 10.50
Loans secured by non-marketable assets or guarantees 1 day 10.25 10.00
from 2 to 549 days3 11.00 10.75
Open market operations (min bid rates) Loans secured by non-marketable assets, auctions3 3 months 9.50 9.25
FX swap auctions1 from 1 to 2 days4 9.25 (key rate) 9.00 (key rate)
REPO auctions from 1 to 6 days4, 1 week
Liquidity absorption Open market operations (max bid rates) Deposit auctions from 1 to 6 days4, 1 week
Standing facilities Deposit operations 1 day, call 8.25 8.00
Memo item: Refinancing rate5
1 Interest rate on the ruble leg; interest rates on the FX leg are equal to LIBOR rates on overnight loans in respective foreign currencies.
Starting from 01.04.2017 operations were discontinued.
3 Loans provided at a floating interest rate, linked to the Bank of Russia key rate.
4 Fine-tuning operations.
Starting from 1 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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