JUNE 2019

Monetary Policy

Key rate is down to 7.5% p.a.

Inflation forecast for 2019 is down to 4.2-4.7%

Further key rate cut is possible if the situation develops in line with the baseline forecast of the Bank of Russia

When making its decision to cut the key rate, the Bank of Russia considered the following factors:

There is a stable trend towards inflation slowdown

Inflation, YoY and BoR key rate, % per annum

We passed the inflation peak of 5.3%, slightly lower than expected, in March. Annual inflation fell to 5.1% in May. These dynamics are attributed to the following factors:

  • the fading of the VAT hike effect on inflation;
  • ruble appreciation since the beginning of the year;
  • the agreement on retail fuel prices between the Russian Government and major oil companies;
  • moderate dynamics of domestic demand.
Households’ inflation expectations remain elevated

Household’s inflation expectations (inFOM surveys), observed inflation (inFOM surveys) and inflation, YoY

Inflation expectations show mixed dynamics. Business price expectations continued to decline in April-May. Inflation expectations of households came in at 9.3-9.4% during this period. Analysts’ expectations remain anchored at the inflation target of around 4%.

The slowdown of inflation to 4% will bring down inflation expectations of households and businesses.

Economic growth in the first half of the year has been lower than expected

GDP growth, YoY

The 2018 data and preliminary 2019 Q1 estimates allow us to update GDP forecast for this year. In particular, the revision is associated with lower export growth rates and a moderate  outlook for growth in the global economy and external demand. We have left the forecast for consumer and investment demand unchanged in view of the expected rise in public expenditure in the second half of the year. As a result, the 2019 GDP growth forecast was reduced from 1.2-1.7% to 1-1.5%.

Monetary conditions are softening

OFZ yields and the Bank of Russia key rate, %

The easing is driven by changing expectations of financial market players. Expectations as to the path of the Bank of Russia key rate were revised downwards. Expectations and yields in the external financial market were adjusted amid changes in major central banks’ rhetoric. OFZ yields are declining in this environment, enabling a potential reduction in deposit and lending rates. In April-May, a number of major banks revised downwards their interest rates on several deposit products; interest rates on mortgage loans were also beginning to decline.

Short-term proinflationary risks have abated

The VAT hike effects have manifested in full. The central banks of the advanced economies revised their interest rate paths in 2019 H1, thus reducing the risks of considerable capital outflows from emerging markets.

Significant risks are still posed by elevated and unanchored inflation expectations, as well as by several external factors, including the risks of the global economy’s slowdown and increased volatility in global commodity and financial markets.

The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements, prices of individual food products, and possible changes in consumer behaviour. These risks remain moderate.


Preemptive key rate decisions of the Bank of Russia contributed to inflation slowdown

According to the updated inflation forecast, this year inflation will slow down to 4.2-4.7% and, moving forward, will stay close to 4%. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to a neutral monetary policy until mid-2020.