Russia Monetary Policy July 2016


Bank Rossii maintains rate in July after cut in June

Russia’s Central Bank (Bank Rossii) maintained the one-week repo rate at 10.50% at its 29 July meeting. The decision, which was in line with expectations, followed the Bank’s first rate cut in nearly a year in June. Although a sharp decline in inflation over the last year—from over 15.0% during much of 2015 to 7.5% in June—has given the Central Bank some breathing space, the Bank cautiously pointed out that, “the decline in inflation expectations had stalled,” but stated that it is on track to hit the inflation target of 4.0% toward the end of 2017.

The Bank’s Board of Directors attributed the decision to the fact that the fall in inflation had been in line with the Bank’s expectations and mainly reflected an environment of financial stability, weak private consumption and the indexation of administered prices. Nevertheless, Bank Rossii expressed its concerns about a sudden halt in the decline in core inflation as well as in inflation expectations, combined with the rise in wage pressures and the drop in bank deposit rates. Moreover, the Bank stated that tight monetary conditions will persist, though they will ease somewhat following the contraction of the banking sector’s liquidity deficit.

The Bank noted that although economic slack persists, the recovery continues. According to the Bank, GDP is likely to show positive quarter-on-quarter growth in the second half of 2016, while annual growth rates will touch positive territory in 2017. However, the Bank recognized that growth in some industries has either stagnated or is in decline, and investment continues to deteriorate. Conversely, non-oil exports are growing and import substitution is rising.

At the end of its communiqué, Bank Rossii considered the possibility of further interest rate cuts, which will depend on the evolution of inflation and inflation expectations. This message can be interpreted as paving the way for the Bank to embark on an easing cycle, which could give a boost to sluggish economic activity. The Bank’s next monetary policy meeting is scheduled for 16 September.

The vast majority of the group of analysts FocusEconomics surveyed this month predict that the Central Bank will cut interest rates this year and in 2017. Our panel of economists expects the one-week repurchase rate to end 2016 at 9.27% and 2017 at 7.58%.

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Russia Monetary Policy Chart

Russia Monetary Policy July 2016 0

Note: 1-Week Repo rate in %.
Source: Central Bank of the Russian Federation (CBR).

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