Russia: Bank Rossii decides to keep interest rates unchanged, but hints at tightening
January 29, 2016
In its first monetary policy of 2016, which took place on 29 January, Russia’s Central Bank (Bank Rossii) decided to leave the one-week repo rate unchanged at 11.00%. The Bank’s decision to maintain the level of the main monetary policy rate matched market expectations and marked the fourth consecutive meeting in which no change was made, following five consecutive rate cuts.
In an unusual fashion, Bank Rossi began its statement by citing the increased risks that higher inflation may result from a slump in oil prices. Moreover, the Bank emphasized that, amid a continued deterioration in global commodities markets, the Russian economy will require further adjustment. In addition, the Central Bank cautioned that, “if inflation risks amplify, the Bank of Russia cannot rule out a tightening of its monetary policy.”
Bank Rossii, which cut the one-week repo rate by a total of 600 basis points in 2015 as it began to roll back 2014’s hike of a total of 1,150 basis points, stated in January that, “the stubborn glut of oil, the slowing Chinese economy, combined with the US Federal Reserve rate hike, have triggered a further drop in the price of crude. This, in its turn, caused the national currencies to weaken and asset prices to drop in emerging markets, affecting Russia. With more volatility in oil prices, the magnitude of variation in Russian financial asset prices and the ruble exchange rate fluctuation has increased.”
The plunge in global oil prices at the beginning of the year, with the global oil benchmark price falling below USD 30.0 per barrel, pushed the Russian ruble to a new record-low of 82.4 RUB per USD on 21 January. After the price plunge, however, the ruble did recover some of the ground it had lost thanks to a rebound in oil prices. Bank Rossii stressed that the recent weakening of the Russian currency is likely to fuel inflation in the coming months despite the recent slowdown in the evolution of consumer prices, thus causing inflation expectations to increase. Given the recent developments in the foreign exchange markets, the Central Bank also provided a near-term view for inflation. The Bank expects inflation of a range between 8.0% and 9.0% in Q1 and sees risks of an acceleration in the following quarter.
Regarding Russia’s current economic situation, the Central bank went on to recognize that its decision to maintain interest rates at the current level took into account, “the elevated risks of continued recession provoked by falling oil prices.” Oil prices are still stubbornly low and the Central Bank pointed out that it will have to revise its forecast for the evolution of prices this year and also its GDP growth forecasts for 2016, stating that, “the floating exchange rate will partially offset the negative impact of energy prices on the economy. However, the balance of payments and the economy will have to be further adjusted to lower global prices for the key Russian exports. This will result in a more sizable GDP contraction in 2016 than forecast previously in the baseline scenario.”
Should oil prices remain low in the foreseeable future, this would fuel inflation in the coming months and escalate instability in Russia’s financial markets. Consequently, the Bank concluded that, if this scenario materializes, a more extensive adjustment of the economy to the new conditions will be required, while authorities did not rule out further changes to the monetary stance. The Central Bank will hold the next board meeting on 18 March.
Author: Ricardo Aceves, Senior Economist