Russia Monetary Policy June 2016


Central Bank of Russia cuts interest rates for the first time in nearly a year

At its 10 June Board of Directors’ meeting, the Central Bank of Russia (Bank Rossii) announced its decision to cut the one-week repo rate by 50 basis points to 10.50%. Although the decision to cut rates was expected, the size of the cut was larger than analysts had forecast, as the Consensus view was for a more moderate 25-basis-point cut. This is the first time that the Central Bank has lowered the interest rate in nearly a year and, symbolically, the cut has brought it to the level it was at before the emergency rate hike to 17.00% in December 2014.

In making the decision to cut interest rates, the Central Bank indicated that authorities are more confident about the evolution of inflation and noted the positive results of a drop in inflation expectations and decreased inflation risks against a backdrop of a slow recovery of the economy. Regarding the country’s economic activity, the Central Bank said that recent data indicate that the economy is gradually improving, although private consumption remains weak. Investment is still depressed in some industries, particularly in the industries that have traditionally been sources of growth for the Russian economy. Yet positive signs appeared in the first half of the year and the Bank indicated that it expects economic growth toward the end of the year.

In terms of commodities markets, the Central Bank recognized that the evolution of prices remains favorable, as they have contributed to bringing more stability to the ruble—which is closely correlated to oil prices—and have also calmed movements in food prices. In its statement, the Bank added that it expects inflation to end this year within a range of 5.0% and 6.0% and that inflation should drop below 5.0% by May 2017in order to reach the medium-term inflation target of 4.0% at the end of 2017. At the same time, the economic outlook has improved. Under its base-line scenario—oil prices averaging USD 38 per barrel this year and USD 40 per barrel in 2017 and 2018—the Bank expects the economy to contract by between 0.3% and 0.7% this year (compared to its previous estimate of a 1.3% decline) and sees it growing 1.3% next year.

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 the alignment of risks to the Bank’s forecast trajectory. This message can be interpreted as a way for the Bank to embark on an easing cycle, which could prop up the battered economy. The Bank’s next monetary policy meeting is scheduled for 29 July.

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 June 2016 1

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

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