Russia Monetary Policy March 2017


Russia: Bank Rossii makes surprise rate cut, the first in seven months

March 24, 2017

Russia’s Central Bank surprised the markets by cutting the one-week repo rate from 10.00% to 9.75%. The Bank made the decision at its second monetary policy meeting of the year held on 24 March and the move marked the first cut in the policy rate in seven months. Analysts did not expect this move as that the Bank had given clear guidance that it had not intended to cut the interest rate in the first quarter of the year. However, a continued decline in inflation and signs that economic activity is being revived, prompted rate-setters to cut interest rates.

Inflation fell to a nearly-five-year low of 4.6% in February and, according to the Central Bank, it continued to fall in March mainly thanks to the strengthening of the Russian ruble—amid higher oil prices and a decline in the sovereign risk premium that caused an increase in capital inflows—and lower food prices as a result of a bumper 2015/2016 harvest that lead to an increase in stocks of agricultural products. The Central Bank added that further rate cuts in the second and third quarters of this year are feasible as it forecasts GDP growth to come in at a moderate 1.0%–1.5% this year, and sees inflation falling to its 4.0% target at the end of this year and remaining around the target in 2018 and 2019. However, the Bank noted that it intends to keep real interest rates positive, which means that the monetary authority aims to keep monetary conditions “moderately high”. With this, Bank Rossii wants to anchor inflation expectations and ensure demand for Russian assets and an increase in the propensity to save.

The Russian ruble gain some strength following the Central Bank’s decision, approaching the 57.0 RUB per USD mark. The ruble continues to appreciate against the greenback despite the recent drop in oil prices as investors are following a carry trade strategy. This strategy involves borrowing at a low interest rate—usually in a developed economy—and using the funds to re-invest in assets with higher return, likely in emerging markets. As Vladimir Miklashevsky, Senior Economist at Danske Bank puts it:

“This is Russia’s paradox, which is still logical: lower rates, better economy, buy the ruble. The carry is good enough even with the upcoming gradual easing.”

The markets continue to be bullish on the ruble, hence its resilience in the face of falling oil prices. Moreover, the Russian regulator pointed out that Ministry of Finance purchases of foreign currency have not had any substantial impact on the recent exchange rate dynamics of the ruble.

Although the Central Bank offered prospects for further cuts in the interest rate, it cautioned that there are still risks that could cause inflation to miss the target. Among these risks are an increase in inflation expectations, Russian consumers going on a spending spree, and an increase in volatility in financial markets and commodity prices, which can modify expectations regarding the exchange rate and inflation. The Central Bank will hold its next monetary policy meeting on 28 April.

The analysts we surveyed this month expect the Central Bank to continue cutting interest in the second half of the year and forecast the interest rate to end at 8.23% this year. Economists see the Central Bank lowering the monetary policy rate further in 2018, with an average Consensus of 7.14%.

Author:, Senior Economist

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Russia Monetary Policy Chart

Russia Monetary Policy April 2017

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

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