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The Bank of Russia decided to reduce the key rate from 10.00 to 9.75% p.a.

24 марта 2017 года

On 24 March 2017, the Bank of Russia Board of Directors decided to reduce the key rate from 10.00 to 9.75% p.a. The Board of Directors notes that inflation slowdown overshoots the forecast, inflation expectations continue to decline and economic activity recovers. Inflation risks have slightly dropped but remain elevated. In these circumstances, given the moderately tight monetary policy, the 4% inflation target will be achieved by the end of 2017 and will be maintained at this level further.

While assessing evolving inflation dynamics and economic developments against the forecast, the Bank of Russia admits the possibility of cutting the key rate gradually in coming Q2-Q3.

In making its key rate decision, the Bank of Russia Board of Directors has proceeded from the following factors.

Inflation dynamics. Inflation declines ahead of the forecast. Over the first twenty days in March, annual consumer price growth dropped to an estimated 4.3%, from 5.0% in January 2017. February saw a continued slowdown in price growth across all key groups of goods and services, and a reduction in seasonally adjusted monthly inflation. Inflation slowdown was broadly facilitated by the ruble appreciation amid higher than expected oil prices, persistent interest in investment in Russian assets among external investors, and a drop in the sovereign risk premium. Bumper harvests of 2015-2016 resulted in high stocks of agricultural products, leading to a material slowdown in food inflation and falling vegetable and fruit prices.

Disinflationary drag from domestic demand persists. Households broadly tend to demonstrate savings behaviour patterns. There are signs of revival in consumption and wages are growing both in nominal and real terms. Consumer lending dynamics does not pose any risks for inflation. Noticeable inflation deceleration will be conducive to a further reduction in inflation expectations among households and businesses. Given the decision taken and persistent moderately tight monetary policy, the Bank of Russia forecasts that the annual consumer price growth will reduce to 4% by the end of 2017 and will remain within this target range in 2018-2019.

Monetary conditions. In order to maintain the propensity to save and anchor sustainable inflation slowdown driven by demand-side restrictions, monetary conditions should remain moderately tight. Positive real interest rates will be held at the level which will ensure demand for loans without increasing inflationary pressure and will uphold incentives for saving. A gradual decline in nominal interest rates and the easing of non-price bank lending conditions will remain. Given banks’ conservative policy stance, these trends will mostly influence high-quality borrowers. The Finance Ministry’s purchases of foreign currency in the FX market did not have any substantial impact on the ruble exchange rate dynamics as the driving factors of its appreciation remained dominant. Short-term inflation risks related to these operations did not materialise.

Economic activity. The pace of economic recovery is higher than expected. Estimates show that quarterly GDP has been going up since 2016 Q2 and the trend is set to continue. January — February 2017 saw an ongoing annual industrial production growth (adjusted for calendar factors) and a gradual rebound in investment activity. Fixed capital investment is expected to advance in Q1. Unemployment remains persistently low. The labour market is adapting to the new economic conditions with occasional signs of labour shortages in certain segments. Recovery is becoming more even across the regions. Polling data reflects an improvement in business and household sentiment, conducive to favourable economic dynamics. According to the Bank of Russia estimates, the observed annual rise in real wages fosters gradual growth in consumer activity without posing an additional proinflationary pressure amid increased supply of goods and services.

The Bank of Russia takes into consideration the oil market uncertainty and keeps pursuing a conservative approach to the forecast, which assumes an oil price reduction to $40 per barrel by the end of 2017 and its further staying near this level. GDP is expected to grow by 1-1.5% in 2017 and by 1-2% in 2018-2019 considering the current dynamics of recovery processes and higher economy resilience to fluctuations in external economic environment. It takes structural changes and time for positive trends to evolve and take root.

Inflation risks. The risks that inflation will miss the 4% target by the end of 2017 have slightly abated. Nevertheless, there are still risks that inflation may fail to anchor at the target level in the medium run. These risks are implied by the inertia of inflation expectations, as well as a possible rapid decline in households’ propensity to save. Volatility in the global commodity and financial markets may weigh negatively on expectations with regard to exchange rate and inflation. The said risks may also materialise over the mid-term horizon. Moderately tight monetary policy will allow to limit their effects and maintain consumer price growth rates close to 4%.

While assessing evolving inflation dynamics and economic developments against the forecast, the Bank of Russia admits the possibility of cutting the key rate gradually in coming Q2-Q3.

The Bank of Russia Board of Directors will hold its next rate review meeting on 28 April 2017. The press release on the Bank of Russia Board 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 19.09.16 Rate since 27.03.17
Liquidity provision Standing facilities Overnight loans; FX swaps1; Lombard loans; REPO 1 day 11.00 10.75
Loans secured by gold 1 day 11.00 10.75
from 2 to 549 days2 11.50 11.25
Loans secured by non-marketable assets or guarantees 1 day 11.00 10.75
from 2 to 549 days2 11.75 11.50
Open market operations (min bid rates) Loans secured by non-marketable assets, auctions2 from 1 to 3 weeks3, 3 months, 18 months3 10.25 10.00
Lombard credit auctions2,3 36 months 10.25 10.00
FX swap auctions1 from 1 to 2 days4 10.00 (key rate) 9.75 (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 9.00 8.75
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.
2 Loans provided at a floating interest rate, linked to the Bank of Russia key rate.
3 Starting from 01.07.2016 auctions were discontinued.
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
Interest rates on the Bank of Russia suspended operations

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