On 31 October 2014 the Bank of Russia Board of Directors decided to raise the
Bank of Russia key rate to 9.5 percent per annum. During September-October significant changes in external conditions have taken place: considerable fall in oil prices and stricter sanctions imposed by certain countries against several large Russian companies. As a result the ruble depreciated that together with restrictions on the import of certain food items imposed in August resulted in further acceleration in consumer prices growth. According to the Bank of Russia estimates, inflation will remain above 8% till the end of 2014 and in 2015 Q1. Continuing high growth of consumer price will result in persistent increase in inflation expectations creating additional inflation risks. The Bank of Russia will continue to take measures aimed at slowing down consumer prices growth to the target of 4% in the medium run. If the external conditions improve and inflation and inflation expectation show a stable downward trend, the Bank of Russia will be ready to start monetary policy easing.
In September-October, inflation grew more rapidly than had been expected earlier. According to the estimates as of the 27 October, annual consumer price growth rate was 8.4%. Core inflation rose to 8.2% in September 2014. Acceleration of inflation was mainly provoked by accelerated price growth for food items from 10.3% in August to 11.4% in September. Price growth rates for non-food products remained stable at 5.5%. Inflation dynamics was mainly influenced by ruble depreciation and external trade restrictions imposed in August 2014. According to the Bank of Russia estimates, cumulative impact of these factors on the annual consumer prices growth to the end of the 2014 will be about 2.5 pp (of which 1.2 pp — impact of external trade restrictions imposed in August, 1.3 pp — impact of ruble depreciation). Amid accelerated consumer prices growth, inflation expectations of households and businesses continued to increase imposing additional pressure on prices.
Tighter monetary conditions haven’t offset the influence of the aforementioned factors on inflation expectations yet though monetary aggregates dynamics sets the ground for inflation decline in the medium run. According to the estimates, annual money supply (M2) growth rate decreased from 16.1% on 1 October 2013 to 7.4% on 1 October 2014. Continuing growth of interest rates on household deposits contributes to maintain the propensity to save and increase attractiveness of deposits for cash holdings. Given interest rates hike and tighter borrower and collateral requirements, lending growth sees a slowdown (adjusted for currency revaluation).
According to the Bank of Russia estimates, annual GDP growth rate in 2014 Q3 was 0.2%. Economic slack does not have considerable restraining effect on consumer prices increase 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 decreases. Besides structural factors, increased external political uncertainty has an adverse impact on economic activity. Amid limited access to long-term financing and higher borrower requirements from Russian banks, fixed capital investments are contracting. At the same time consumer demand is cooling down as real wage growth and retail lending are slowing. External economic conditions have restraining effect on the Russian economy: oil prices see a significant decline while economic activity of most Russia’s trading partners remains weak. However, exchange rate dynamics and restrictions on the import of certain food items support some industries. According to the Bank of Russia estimates, economic growth rate in 2014 Q4 and 2015 Q1 will be close to zero.
Consumer prices growth is very likely to persist at the current level till the end of Q1 2015 due to remaining sizeable impact of restrictions on the import of certain food items and ruble depreciation in August-October 2014 on prices. Later, as the economy gradually adjusts to external trade restrictions and the impact of exchange rate dynamics on prices reduction, inflation and inflation expectations are expected to see a renewed decrease. Slower consumer prices growth will also be facilitated by subdued aggregate demand with aggregate goods and services output remaining below the potential. However, inflation decline will be slower than previously expected. The Bank of Russia will continue to take measures aimed at stabilising inflation expectations and slowing down consumer prices growth to the target in the medium term. Should the external conditions improve, and inflation and inflation expectation 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
11 December 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
||Type of instrument
||Rate since 28.07.14
||Rate since 05.11.14
||Standing facilities (fixed interest rates)
Overnight loans;Lombard loans;
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
||8.00 (key rate)
|| 9.50 (key rate)
||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’.