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The Bank of Russia decided to keep the key rate at 10.50%

29 July 2016
Press release

On 29 July 2016, the Bank of Russia Board of Directors decided to keep the key rate at 10.50 percent per annum. The Board notes that inflation dynamics and the nascent rebound in economic activity are overall aligned to the Bank of Russia’s baseline forecast. However, the decline in inflation expectations has stalled. This decision, along with the maintenance of moderately tight monetary policy, will help deliver on the inflation target. The Bank of Russia forecasts that the annual growth rate of consumer prices will be less than 5% in July 2017, to reach the target of 4% in late 2017. The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and the alignment of inflation decline with the forecast trajectory.

In making the key rate decision, the Board of Directors of the Bank of Russia was guided by the following considerations:

First. Inflation is currently slowing down in line with the Bank of Russia’s baseline forecast. This is helped by the economic environment including steady Russian financial market, persistently weak consumer demand and the indexation of administered prices and rates as previously planned. The Bank of Russia estimates the annual growth rate of consumer prices to decline, as of 25 July 2016, to 7.2%. At the same time, there has been a stop in the decline of core inflation, seasonally adjusted monthly growth rates of consumer prices and inflation expectations. The slowdown of inflation is set to continue, primarily triggered by demand-side constraints. The lower — compared to last year’s — indexation of administered prices and rates in July, as well as the expectations for good crops, will contribute to the slowdown of inflation, helping recede inflation expectations. According to the Bank of Russia forecast, as the moderately tight monetary conditions remain in place, annual inflation will dip below 5% in July 2017 to reach the target level of 4% by late 2017.

Second. The tight monetary conditions will be maintained, although somewhat eased following the contraction of the banking sector’s liquidity deficit and the June 2016 reduction in the Bank of Russia key rate. The real interest rates in the economy (adjusted for inflation expectations) will stay at a mark where demand for credit will be met without heightened inflationary pressure, retaining the incentives to save. To enable operating control over the level and structure of market interest rates, in the context of the switchover to a nascent liquidity surplus in the banking sector, the Bank of Russia will use the appropriate toolset to absorb liquidity.

Third. Production recovery fails to cause consumer price growth amid slack demand. Import substitution steps up and non-commodity exports expand. Economic dynamics are patchy across sectors and regions. Industry, including manufacturing, discovers new opportunities for growth. At the same time, certain industries stagnate or show lower output growth, while investment continues to contract. Nevertheless, the trend for economic recovery prevails. Positive quarterly growth of GDP is possible in the second half of the year. Annual GDP growth is predicted to enter positive territory in 2017.

Fourth. The risks of failure to deliver on the 4% inflation target in 2017 persist following primarily, along with the external risks, the inertia of inflation expectations and the uncertainty over specific fiscal consolidation measures, including wage and pension indexation. The emerging trend towards wage increase and deposit rate cut may undermine households’ propensity to save. To alleviate these risks, the Bank of Russia has to keep rates at a level that encourages saving, brings down inflation expectations and promotes sustainable inflation reduction to the target level.

The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and the alignment of inflation decline with the forecast trajectory.

The Bank of Russia Board of Directors will hold its next rate review meeting on 16 September 2016. The press release on the Bank of Russia Board decision 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 03.08.15 Rate since 14.06.16
Liquidity provision Standing facilities Overnight loans; FX swaps (ruble leg); Lombard loans; REPO 1 day 12.00 11.50
Loans secured by gold 1 day 12.00 11.50
from 2 to 549 days1 12.50 12.00
Loans secured by non-marketable assets or guarantees 1 day 12.00 11.50
from 2 to 549 days1 12.75 12.25
Open market operations (min bid rates) Loans secured by non-marketable assets, auctions1 from 1 to 3 weeks2,
3 months, 18 months2
11.25 10.75
Lombard credit auctions1,2 36 months 11.25 10.75
REPO and FX swap auctions from 1 to 6 days3,
1 week
(key rate)
(key rate)
Liquidity absorption Open market operations (max bid rates) Deposit auctions from 1 to 6 days3,
1 week
Standing facilities Deposit operations 1 day, call 10.00 9.50
Memo item: Refinancing rate4
1 Loans provided at a floating interest rate, linked to the Bank of Russia key rate.

2 Starting from 01.07.2016 auctions were discontinued.

3 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

Interest rates on the Bank of Russia suspended operations

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