The Central Bank of the Russian Federation (Bank of Russia)

Press Service

12 Neglinnaya Street, Moscow, 107016 Russia;
www.cbr.ru

Information Notice

The Bank of Russia keeps the key rate at 7.75% per annum

On 22 March 2019, the Bank of Russia Board of Directors decided to keep the key rate at 7.75% per annum. In February—March 2019, inflation is holding somewhat lower than the Bank of Russia’s expectations. Despite the fact that inflation expectations of households and businesses notably declined in February and March, they remain elevated. The contribution of the VAT increase to annual consumer price growth has largely materialised. However, deferred effects may manifest themselves in the months to come. Short-term pro-inflationary risks have abated. In view of the above, the Bank of Russia has lowered its end-of-year annual inflation forecast in 2019 from 5.0-5.5% to 4.7-5.2% and expects inflation to return to 4% in the first half of 2020.

In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in 2019.

Inflation dynamics. In February—March 2019, annual inflation is holding lower than the Bank of Russia’s expectations. In February, annual consumer price growth rate rose to 5.2% (vs 5.0% in January 2019). As of 18 March, annual inflation was 5.3%. The VAT increase pass-through to prices has largely materialised. Its contribution to annual inflation was around 0.6-0.7 pp, which corresponds to the lower bound of the Bank of Russia expectations range. Certain deferred effects of the VAT hike may manifest themselves in the months to come. An accurate assessment of the VAT increase effect on inflation can be made in the second quarter of the current year.

Faster growth of food prices to 5.9% (vs 5.5% in January 2019) played a significant role in the inflation rise in February. Accelerating food inflation is largely bouncing back after a considerable drop in the second half of 2017 and the first half of 2018. Accordingly, the low base effect of food prices noticeably contributes to the annual consumer price index growth rate. Prices of non-food goods and services rose less than food prices over the past 12 months. The acceleration of annual inflation was curbed by consumer demand and income dynamics, ruble appreciation, the decline in prices of principal types of motor fuel and certain food products in February vs January. Inflation was also held back by the Bank of Russia’s September and December 2018 pre-emptive decisions to increase the key rate.

Despite the fact that inflation expectations of households and businesses notably declined in February and March, they remain elevated.

According to the Bank of Russia’s forecast, annual inflation will pass its local peak in March—April 2019. That said, the Bank of Russia has lowered its end-of-year annual inflation forecast in 2019 from 5.0-5.5% to 4.7-5.2%. Quarterly year-on-year consumer price growth is set to decelerate to 4% as early as the second half of 2019. Annual inflation will return to 4% in the first half of 2020 when the effects of ruble’s weakening in 2018 and the VAT rise peter out.

Monetary conditions. Since the beginning of this year, monetary conditions have not seen significant changes. Interest rates across segments of the domestic financial market have showed a variety of trends. OFZ yields declined on the back of the improved situation in global financial markets and revised expectations of market participants with regard to the future Bank of Russia’s key rate path. Deposit rates slightly increased while credit rates stabilised. That said, the dynamics of OFZ yields limits the potential for further growth of deposit and credit rates and creates conditions for their decline in the future. Sustained positive real interest rates are set to support the attractiveness of savings and balanced growth in consumption.

Economic activity. The economy is close to its potential. Current consumer demand movements and labour market conditions do not generate excessive inflationary pressure. In January—February, annual industrial production growth was the same as in 2018 Q4. Investment activity growth is still moderate. As predicted by the Bank of Russia’s forecast, annual retail sales growth declined in January—February as a result of the VAT increase and a slowdown in wage growth.

The Bank of Russia maintains its 2019 GDP growth forecast in the range of 1.2-1.7%. The VAT hike slightly constrains business activity. Newly attracted budgetary funds will be used to boost government spending, including spending on investments, as early as 2019. Subsequent years might see higher economic growth rates as national projects are implemented.

Inflation risks. Short-term pro-inflationary risks have abated. With regard to internal conditions, secondary effects of the VAT increase and enhanced growth in prices of certain food products became less of a risk. As for external conditions, the revision of interest rates path by the US Fed and other central banks in advanced economies reduces the risks of persistent capital outflows from emerging markets.

At the same time, the risk of a slowdown in global economic growth still looms. Geopolitical factors might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations. Despite the oil price growth since the beginning of the year, the risks of supply exceeding demand in the 2019 oil market remain elevated.

Elevated and unanchored inflation expectations also pose a meaningful risk.

The Bank of Russia leaves mostly unchanged its assessment of risks associated with wage movements, possible changes in consumer behaviour and budget expenditures. These risks remain moderate.

In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in 2019.

The Bank of Russia Board of Directors will hold its next rate review meeting on 26 April 2019. The Board decision press release is to be published at 13:30 Moscow time.

In the follow-up to the Board of Directors meeting of 22 March 2019 the Bank of Russia released its medium-term forecast.

22 March 2019

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2019-03-22T13:30:00.390

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