Russia: Bank Rossii leaves interest rate unchanged
September 12, 2014
The Russian Central Bank decided to maintain the one-week repo rate at 8.00% at its 12 September meeting. The Bank’s decision was broadly in line with market expectations. At its previous meeting, which was held on 25 July, Bank Rossii surprisingly hiked the interest rate by 50 basis points as monetary authorities had recognized that the inflation target would not be met in 2014 and had also underlined that political instability would push up inflation expectations.
In the latest meeting, the Central Bank pointed out that inflation rose again in August due to the, “materialization of inflation risks associated with aggravation of geopolitical tensions, the imposition of external trade restrictions and the impact of these developments on the ruble exchange rate dynamics.” Consequently, the Bank re-affirmed its assessment that inflation is likely to still be above 7.0% at the end of this year and that the current circumstances have prompted households’ inflation expectations to increase.
Regarding the country’s economic performance, the Central Bank continued to point out that structural factors are the main cause of sluggish economic growth. In addition, the Bank recognized that geopolitical uncertainty is having a negative impact on economic activity. Increasing pessimism among businesses and investors and limited access to long-term financing in both domestic and international markets are taking a toll on investment. Moreover, the Bank stated that consumption is gradually cooling amid a slowdown in real wages. On a positive note, Bank Rossii said that still-high oil prices will support the economy.
Going forward, the Bank underlined that economic activity will slow further in the second half of 2014 as a result of the new sanctions imposed by the United States and the European Union. As a result, the Bank expects GDP to contract 0.2% annually in the third quarter of this year and to rebound to a 0.4% expansion in Q4. The next monetary policy meeting is scheduled for 31 October.
Author: Ricardo Aceves, Senior Economist