Russia Monetary Policy


Russia: Central Bank cuts interest rates for fifth time this year, reduces pace of easing

July 31, 2015

At its 31 July monetary policy meeting, Russia’s Central Bank cut the one-week repurchase rate by 50 basis points, from 11.50% to 11.00%. The size of the cut—the single smallest so far this year—was in line with market expectations, as analysts had anticipated that the Central Bank would reduce the pace of easing in July. So far this year, the Russian Central Bank has cut its main monetary policy rate by a total of 600 basis points.

The Central Bank’s decision was primarily driven by the need to revive the battered economy without letting inflation spike. In its statement, the Central Bank said that it lowered interest rates, “taking into account that the balance of risks shifts towards the considerable economy cooling despite a slight increase in inflation risks.” Monetary policy makers stated that recent economic data confirmed that the recession deepened in the second quarter; but, the government’s anti-recession measures will provide some support to domestic demand through investment. Moreover, the Bank sees that due to the weakening of the ruble, exports will be a key contributor to economic growth. Considering consumer price developments, the Central Bank pointed out that inflation picked up slightly in July, reflecting temporary effects, whereas due to weak economic activity and sluggish domestic demand, inflation will continue slowing, which will facilitate inflation expectations to remain contained.

In contrast to other monetary policy statements, the regulators indicated that further decisions on interest rates will hang on the balance between risks of higher inflation and risks of deteriorating economic conditions. Regarding this comment, Anatoliy A Shal, Chief Russia Economist at J.P. Morgan said:

The CBR delivered on expectations of a 50bp cut at today’s meeting, in spite of the recent decline in oil and the RUB. Yet, the accompanying statement sent a clear message that recent market developments have not been unnoticed. The phrase about readiness to continue policy easing, even if at reduced pace, was omitted from the statement and future moves are now conditioned on the “balance of inflation and growth risks”. In other words, the CBR sounds less dovish relative to the last meeting.

Although the majority of private sector analysts predict further cuts in the main monetary policy rate this year—with the FocusEconomics panel of economists expecting the monetary policy rate to end this year at 9.73% and at 7.47%—at the next monetary policy meeting, scheduled for 11 September, the Central Bank could stay put as there are increasing risks that the Russian ruble could weaken substantially should the U.S. Federal Reserve tighten its monetary policy rate. Regarding this approach, Anatoliy A Shal further commented:

We expect the CBR to stay on hold in September. All in all, our reading of CBR is that it will likely prefer to err on the side of caution and keep rates unchanged at the meeting on September 11, ahead of the expected Fed liftoff. Data flow and markets may, of course, change this outlook, but we take it as a base case for now. The easing cycle is likely to continue in 4Q and we keep our forecast for two 50bp cuts for the October and December meetings, i.e. see key rate at 10.0% by year-end, instead of 9.5% before.

Author:, Senior Economist

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Russia Monetary Policy Chart

Russia Monetary Policy July 2015

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

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