Russia Monetary Policy July 2019

Russia: Central Bank cuts key rate again in July; tone remains dovish

At its 26 July meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) trimmed the key interest rate by 25 basis points to 7.25%, marking the second consecutive rate cut this year. The decision, which came in line with market expectations, was guided by slowing inflation and persistently weak economic activity.

Receding price pressures largely drove the CRB’s decision as inflation fell to a six-month low of 4.7% in June (May: 5.1%). Soft consumer demand, a strong ruble and an early harvest underpinned the disinflationary trend in June, with core inflation moderating for the first time in over a year. Meanwhile, lackluster activity growth in the first half of the year added further pressure for the Bank to soften its policy stance. In the accompanying statement, the Bank noted that despite stubbornly elevated households’ inflation expectations it expected the headline rate to return to 4.0% in early 2020.

Looking ahead, the Bank maintained a dovish tone signaling that a third consecutive rate cut is on the table, provided inflation continues trending downward. Notably, the CBR sees disinflationary risks exceeding pro-inflationary ones over the short-term horizon, amid soft external and domestic demand conditions, suggesting rates are likely to be slashed more than once more by the end of 2019.

Commenting on the decision, Anatoliy Shal, an analyst at JPMorgan, noted:

“We continue to forecast next 25bp cuts to come in September, December and June next year, bringing policy rate to 6.5% by mid-2020.[…] the state of the economy and inflation momentum suggest that CBR might need to shift to an accommodative, not neutral stance, especially if the expected acceleration in budget spending fails to prop up growth at the turn of next year. In all, we think risks to our rate forecast are skewed toward a more prolonged / deeper easing cycle.

The next monetary policy meeting is scheduled for 6 September.

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