Russia Monetary Policy February 2018

Russia: Central Bank cuts key interest rate to 7.50% in February

At its 9 February meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) decided to cut the key interest rate by 25 basis points to 7.50%, a move widely expected by market analysts. The decision followed a larger-than-expected 50 basis-points reduction in December and marks the lowest policy rate since June 2014, continuing the CBR’s monetary easing cycle.

The Bank’s decision came after inflationary pressures moderated in recent months, with inflation easing to a record-low 2.2% in January, significantly below the official 4% target. Adjusting its assessment of inflation, the CBR noted that permanent factors may be exerting a stronger effect on inflation dynamics than temporary ones, as previously thought. According to the communiqué, effects from a strong rubble and downward pressures from food prices are expected to subside by the end of the first half of 2018. Weak economic activity in the final quarter of 2017 also contributed to the Bank’s decision to cut its policy rate, even as it acknowledged the reasons behind the slowdown remain somewhat uncertain.

Against this backdrop, the Bank decided that the buildup of risks has slightly shifted towards the economic growth front. It did not see significant upward risks to inflation in 2018 and saw inflation likely falling short of its target this year. As a result, the CBR highlighted its commitment to continue cutting the policy rate and “complete the transition from a moderately tight to neutral monetary policy in 2018.” The sustained easing of policy should help generate the conditions for inflation to pick up and approach the Bank’s target by the end of 2019 rather than the end of 2018, departing from the assessment at its December meeting.

Meanwhile, the Bank maintained its medium-term outlook (2019–2020) from its previous meeting, noting that upside risks to inflation continue to prevail over the risk that inflation will significantly deviate downwards from its target. These upside risks include elevated inflation expectations, lower propensity to save among households and wage growth outpacing productivity growth due to labor shortages.

The next monetary policy meeting is scheduled for 23 March 2018.

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