On 24 April 2020, the Bank of Russia Board of Directors decided to cut the key rate by 50 bp to 5.50% per annum. Since the March Board of Directors meeting, the situation has changed dramatically. Significant restrictive measures have been introduced to combat the coronavirus pandemic both in Russia and across the world, which negatively influences economic activity. This creates material and prolonged disinflationary influence on price dynamics from the aggregate demand perspective, which offsets the effect of temporary pro-inflationary factors, including those related to the fall in oil prices. At the same time the situation in global financial markets has stabilised after a period of particularly high volatility in March. The Bank of Russia has reviewed its baseline forecast scenario and is shifting to accommodative monetary policy. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will reach
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
Inflation dynamics this year and further on will be largely influenced by a steep decline in domestic and external demand. The drop in demand will become a significant disinflationary factor due to the current and deferred economic effect of the restrictive measures introduced to combat the spread of the coronavirus pandemic in Russia and globally. Inflation expectations of households and businesses have increased, but in the face of falling demand their change will be of a short-term nature.
The influence of short-term pro-inflationary factors will be limited. Inflation dynamics data for March and April reflect a temporary response of consumer prices to the weaker ruble and the episodes of increased demand for certain product groups. In March, annual inflation rose to 2.5% (compared to 2.3% in February). According to preliminary data as of 20 April, annual consumer price growth rate was around 3.1%.
According to the Bank of Russia’s baseline forecast, given the monetary policy stance, annual inflation will reach
Monetary conditions remain overall unchanged. Interest rates showed mixed dynamics across different financial market segments. The deposit and credit market largely saw a certain increase in interest rates reflecting the growth of OFZ yields in March on the back of falling prices and rising risk premiums in global financial markets. In April, OFZ yields declined, coming close to the levels observed this February. This was facilitated by the Bank of Russia’s measures to support financial stability as well as by declining volatility in global financial markets, including owing to actions taken by central banks. Lower OFZ yields create conditions for reduction in interest rates in other financial market segments. In addition, the Bank of Russia’s decision to cut the key rate along with regulatory relaxations will compensate for the tightening of monetary conditions on the back of increased risks. This measure, together with other measures implemented by the Bank of Russia, will support lending, including in the most vulnerable economic sectors.
Economic activity. The spread of the coronavirus pandemic in Russia and the restrictive measures in place to address it have combined with a drop in external demand and a further decline in the prices of oil and other export goods to make a substantial negative impact on economic activity. Based on leading indicators, including surveys, activity has seen a steep decline in both the services sector and manufacturing. Both domestic and external markets have registered a contraction in volumes of new orders. Business sentiment and expectations have both deteriorated. In this environment, Q2 GDP is set to decline; however, economic activity is expected to gradually recover as the coronavirus-linked situation normalises and restrictive measures ease both nationwide and across the world.
The Bank of Russia has substantially reviewed its baseline scenario parameters. GDP is forecast to decrease by
The pace of economic recovery will in large measure depend on the amount and efficiency of the Government and Bank of Russia’s measures aimed at mitigating the fallout from the coronavirus pandemic.
Inflation risks. Disinflationary risks under the baseline scenario are substantially driven by the uncertainty as to the spread of the coronavirus pandemic in Russia and globally, the scale of potential measures to fight it and their impact on economic activity, as well as on the speed of a global and domestic economic recovery once restrictive measures have been lifted.
The Bank of Russia notes a decline in short-term pro-inflationary risks related to a more considerable potential pass-through of the ruble weakening into prices, as well as to the episodes of high demand for select product categories. However, disruptions in supply chains in connection with the restrictive measures in place may put localised upward pressure on prices. Some periods of heightened volatility in global markets may well feed into exchange rate and inflation expectations.
When making its key rate decision, the Bank of Russia also considered the objective of maintaining financial stability, especially in the context of an unsteady environment in international commodity and financial markets.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings. In its further key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
In the follow-up to the Board of Directors meeting of 24 April 2020 the Bank of Russia released its medium-term forecast.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 19 June 2020. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.
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