On 11 December 2014 the Bank of Russia Board of Directors decided to raise
the Bank of Russia key rate to 10.5 percent per annum. In November — early December 2014 the upward movement of consumer prices kept on accelerating. Observed increase in inflation expectations and ruble depreciation expectations pose substantial inflation risks. The decision taken by the Bank of Russia is aimed at slowing consumer prices growth to the target of 4% in the medium run. In case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate.
In November — early December, inflation continued to accelerate. According to the estimates as of the 8 of December, annual consumer prices growth rate was equal to 9.4%. Core inflation rose to 8.9% in November 2014. Accelerated consumer prices growth is driven by ruble depreciation in the second half of 2014. External trade restrictions imposed in August 2014 also affected price dynamics. Meanwhile, price growth rate for certain food items flattened out due to the increase of supply by the Russian companies and new import contracts. Amid accelerated consumer prices growth, households’ and businesses’ inflation expectations continued to surge imposing additional pressure on prices. According to the Bank of Russia estimates, end of the year inflation will be around 10%. At the same time, the cumulative contribution of ruble depreciation, restrictions on imports and other factors specific for the markets of several food products, to year-to-year consumer prices growth will account for 4.9 percentage points by the year-end.
Tighter monetary conditions have not offset the influence of the pro-inflationary factors. However, current monetary conditions set the ground for inflation decline in the medium run. According to the estimates as of the 1 of December 2014, annual money supply (M2) growth rate decreased to 4.8% from
16.3% a year earlier. Continuing growth of interest rates on household deposits stimulates the propensity to save and increases the attractiveness of deposits. Given lending rates hike and tighter borrower and collateral requirements, lending growth (adjusted for currency revaluation) slows down. Given the decision made today and time lags of the influence of the interest rate decisions made by the Bank of Russia earlier, on the economy, this process will continue.
According to the Bank of Russia estimates, the annual GDP growth rate will amount to 0.6% in 2014. Economic slack does not have considerable restraining effect on consumer prices growth as it is mostly caused by structural factors. Utilisation of productive factors — labour force and commercially viable productive capacities — is high though labour productivity grows slowly. Due to the long-term demographic trends labour supply shrinks. The remaining external political uncertainty and considerable deterioration of external conditions, resulting from oil price drop and foreign financial markets inaccessibility for the Russian borrowers, also have an adverse impact on economic activity. Amid the increase in prices for the imported investment goods, limited access to long-term financing, and tighter lending conditions, fixed capital investments are contracting. Meanwhile, though the real wage growth and retail lending are slowing, consumer demand remains relatively high due to higher demand for non-food items amid higher inflation expectations. The exchange rate dynamics partially balances the negative impact of deterioration of the external conditions and contributes to higher competitiveness of Russian goods. Besides, restrictions on the import of certain food items support the relevant industries.
Due to the considerable change in the external conditions, the Bank of Russia revised its medium-term macroeconomic forecast. During the next three-year period, economic growth will be lower than previously projected in the baseline scenario due to persistently lower oil prices. Annual GDP growth is expected to be close to zero in 2015-2016. Amid persistently restricted access to the international capital markets for Russian companies and relatively cheap energy resources, fixed capital investments will continue to edge lower. Consumption will remain weak. At the same time, the new exchange rate mechanism will set grounds for more rapid adjustment of the Russian economy to changing external conditions. Economic activity is expected to start recovering in 2017 due to the development of import substituting industries and increase in non-commodity exports.
Over the next months, prices for goods and services will continue to be affected by depreciation of the ruble. During the first quarter of 2015 inflation might be higher than 10%. Nevertheless, inflation and inflation expectations are forecasted to decrease as the impact of the exchange rate dynamics on prices exhausts and economy gradually adjusts to changing external trade conditions and imposed restrictions on imports. Slowdown in consumer prices growth will also be facilitated by subdued aggregate demand with total goods and services output remaining below the potential. The current stance of monetary policy will result in inflation decrease to the target level of 4% in the medium term. In case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate. Should inflation and inflation expectations show a stable downward trend, the Bank of Russia will be ready to start monetary policy easing.
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for
30 January 2015. 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
||Rate since 05.11.14
||Rate since 12.12.14
||Standing facilities (fixed interest rates)
Loans secured by gold;
Loans secured by non-marketable assets and guarantees;
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 day, call
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’.