Russia: Bank Rossii raises rates due to higher inflation risks
April 25, 2014
At its 25 April meeting, Bank Rossii raised the one-week repo rate by 50 basis points to 7.50%, a move that surprised market analysts who had expected the rate to remain at 7.00%. The one-week repo rate now sits at its highest level since August 2009.
The decision was mainly motivated by concerns over rising inflationary pressures. Bank Rossii acknowledged that the escalation in consumer prices was larger than expected, which has increased the probability of inflation exceeding the 5.0% target set for the end of 2014. The Bank attributed the hike in consumer prices to the inflationary dynamics for some food goods. In addition, the Bank said that consumers expected inflation to increase further and thus they increased purchases of foodstuffs in advance, which, in turn, caused inflation to accelerate. In addition, the Bank acknowledged that the depreciation of the ruble in the foreign exchange markets is also pushing up consumer prices.
The Bank did not show concern over the impact of the rate hike on the real economy, which is already posting sluggish growth rates. In fact, it considers that the recent slowdown in economic activity is more attributable to structural factors, such as demographic trends and low productivity growth. Moreover, since these factors are expected to persist in the long run, the recent economic slowdown is not having a significant negative impact on inflation. Instead, exchange rate dynamics and expectations of higher future inflation are the main determinants of consumer price evolution. Bank Rossii considers that the, “international political situation also hampers production and investment.”
The Bank expects that its decision will affect the evolution of prices and, despite the fact that it hardly considers the 5.0% target for the end of 2014 to be achievable, it sees inflation closing the year below 6.0%. Finally, the Bank added that, in the second half of the year, inflation will, “decelerate as a result of lower planned hikes in administered prices and tariffs, falling inflation expectations, and the aggregate output of goods and services remaining below potential.”
Against this backdrop, FocusEconomics Consensus Forecast panelists expect the refinancing rate to close 2014 at 5.92%. For 2015, the panel expects the rate to end the year at 5.20%.