On 13 March 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 15.00 to 14.00 percent per annum taking into account that the balance of risks is still shifted towards a more significant cooling of the economy. This decision will contribute to the reduction of these risks without posing an additional threat of increased inflationary pressure. According to Bank of Russia forecast, the current monetary policy and low economic activity will be conducive to the slowing of annual consumer price growth to 9% over the year (March 2016 on March 2015) and to the target of 4% in 2017. As inflation risks abate, the Bank of Russia will be ready to continue cutting the key rate.
As of 10 March, annual consumer price growth rate stood at 16.7%. Core inflation increased to 16.8% in February, while monthly consumer price growth declined from 3.9% in January to 2.2% in February. The high level of annual inflation is caused primarily by the supply-side factors, i.e. the ruble depreciation and external trade restrictions. Their impact is short-term and will be exhausted before the end of 2015. At the same time, demand-side inflation factors’ dynamics show a pronounced downward trend. A surge in consumer activity at the end of last year was temporary. January 2015 saw a continued fall in real wage growth and a sharp decline in consumer expenditures which exerts a restraining influence on the prices of goods and services.
Current monetary conditions will contribute to consumer price growth decline. Annual money supply (M2) growth rate decreased considerably as compared with the beginning of 2014. Given lending rates hike and tighter borrower and collateral requirements, annual lending growth (adjusted for currency revaluation) slowed down. Despite the key rate cut, it remains rather high for the deposit rates to support the public’s propensity to save.
Structural factors continue to exert a restraining influence on economic growth, however, its slowing is becoming more and more cyclical. Weak economic activity will be conducive to inflation reduction. Further decrease in output is expected amid persistently low oil prices and foreign capital market inaccessibility for Russian borrowers. Fixed capital investments will continue to contract due to high prices for the imported investment goods, deterioration in companies’ financial performance, tighter lending conditions, and high economic uncertainty. The labour market will adjust to new conditions largely through real wage decrease and part-time employment, which along with a slowdown in retail lending growth will result in lower consumer demand. The ruble depreciation will partially mitigate the negative impact of changed external conditions, raising the competitiveness of Russian goods and containing imports along with slack domestic demand. As a result, only net exports will make a positive contribution to output growth. According to Bank of Russia estimates, GDP will fall by 3.5-4.0% in 2015.
Thus, the current economic situation sets a trend towards inflation reduction. According to Bank of Russia forecasts, monthly consumer price growth will continue slowing down. At the same time, given the short-term factors and due to the low base effect, annual inflation will grow with a peak in the second quarter of 2015. A slowdown in annual consumer price growth will be conducive to inflation expectations decrease. According to Bank of Russia forecast, annual inflation will fall to about 9% over the year and to the target of 4% in 2017.
High inflation expectations, review of planned increases in administered prices and tariffs, budget policy easing, and also possible accelerated growth in nominal wages inter alia in the budget sector, are the key risks for inflation dynamics. As the said risks abate, the Bank of Russia will be ready to continue cutting the key rate.
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for
30 April 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 02.02.15
||Rate since 16.03.15
(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,
||from 1 to 6 days3, 1 week
||Open market operations
(maximum interest rates)
||from 1 to 6 days3, 1 week
(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’.