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The Bank of Russia decided to cut the key rate to 9.00% p.a.

16 июня 2017 года

On 16 June 2017, the Bank of Russia Board of Directors decided to cut the key rate to 9.00% per annum. The Board notes that inflation is close to the target, inflation expectations keep declining, and economic activity is recovering. Inflation risks were down in the short term, while they remain in place in the medium term. The Bank of Russia will continue to conduct moderately tight monetary policy to maintain inflation close to the 4% target.

The Bank of Russia sees room for cutting the key rate in the second half of 2017. While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.

In making its key rate decision, the Bank of Russia was guided by the following assumptions.

Inflation dynamics. Annual inflation stood at 4.1% in May keeping close to the target. Low inflation is gradually gaining sustainability. Price growth becomes more homogeneous in regions and for major groups of goods and services. Growth in prices for non-food goods and services continued to decline. Food inflation remains relatively low, although since the supply of last year harvest has become exhausted annual growth in prices for fruit and vegetables is currently rising. Annual inflation registered an expected short-term increase against this backdrop standing at an estimated 4.2% as of 13 June 2017.

As inflation showed a substantial slowdown, inflation expectations of both households and businesses declined considerably. This trend, however, may temporarily come to a halt amid the seasonal rise in prices for certain types of fruit and vegetables, considering that inflation expectations are sensitive to their dynamics. Inflation expectations should be lowered further to anchor inflation close to 4%.

Domestic demand continues to exert a disinflationary impact. Households broadly tend to demonstrate savings behaviour patterns. There are signs of nascent recovery in consumer activity. Consumer lending creates no significant inflation risks so far.

Ruble appreciation made a considerable contribution to consumer price growth slowdown since the start of the year. This factor’s influence on inflation is abating amid the relatively stable exchange rate.

Monetary conditions.

Moderately tight monetary conditions played an important role in slowing down inflation. Against the backdrop of the key rate reduction interest rates on loans have dropped. Their level supports balanced demand for loans. Consumption recovery is not outpacing growth in wages for the time being. Banks continue to adhere to a conservative policy by mitigating price and non-price lending conditions primarily for reliable borrowers. The slowing growth in household deposits was attributable in part to the deposit rate reduction. The Bank of Russia will set the monetary conditions to promote savings, which in turn will curb inflation risks.

Economic activity. Economic activity continues to recover. Household consumption is on the rise alongside with the growth in investment and industrial output. Currently, a moderate growth in consumer expenditures does not exert any inflationary pressure under increased supply of goods and services.

Considering the current recovery trends, the Bank of Russia has increased its GDP growth rate forecast to 1.3-1.8% in 2017. Economic growth is getting closer to its potential level. The situation in the labour market with the shortage of personnel in certain segments being evident is a constraint. In the sequel a GDP growth rate higher than 1.5-2% annually will be reached if structural reforms take place.

Inflation risks. Short-term inflation risks connected with oil price dynamics have declined following the prolongation of the agreement to reduce oil production by oil-exporting countries. At the same time short-term risks arising from the implied harvest, its impact on consumer goods prices and inflation expectations are typical of this season.

Mid-term risks remain elevated. First, they are connected with the further dynamics of oil prices which under reached the agreements began to take shape at a lower level than expected. Legislative consolidation of a budget rule will contribute to mitigating this risk. Second, a higher structural deficit of labour resources can produce a situation when labour productivity growth rates will be left significantly behind the growth in wages. Third, a change in the household behaviour model connected with a substantial decrease in their propensity to save can be a source of inflationary pressure. Fourth, the sensitivity of inflation expectations to price changes for certain groups of goods and services and in the exchange rate dynamics is still present. Fifth, a possible tax manoeuvre can lead to a temporary acceleration in inflation.

Considering these factors the maintenance of moderately tight monetary conditions for a long period of time to anchor inflation close to its target will be required.

The Bank of Russia sees room for cutting the key rate in the second half of 2017. While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.

The Bank of Russia Board of Directors will hold its next rate review meeting on 28 July 2017. The press release on the Bank of Russia Board’s 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 02.05.17 Rate since 19.06.17
Liquidity provision Standing facilities Overnight loans; FX swaps1; Lombard loans; REPO 1 day 10.25 10.00
Loans secured by gold2 1 day 10.25 10.00
from 2 to 549 days3 10.75 10.50
Loans secured by non-marketable assets or guarantees 1 day 10.25 10.00
from 2 to 549 days3 11.00 10.75
Open market operations (min bid rates) Loans secured by non-marketable assets, auctions3 3 months 9.50 9.25
FX swap auctions1 from 1 to 2 days4 9.25 (key rate) 9.00 (key rate)
REPO auctions from 1 to 6 days4, 1 week
Liquidity absorption Open market operations (max bid rates) Deposit auctions from 1 to 6 days4, 1 week
Standing facilities Deposit operations 1 day, call 8.25 8.00
Memo item: Refinancing rate5

1 Interest rate on the ruble leg; interest rates on the FX leg are equal to LIBOR rates on overnight loans in respective foreign currencies. Starting from 01.04.2017 operations were discontinued.
3 Loans provided at a floating interest rate, linked to the Bank of Russia key rate.
4 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

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