Russia Monetary Policy September 2019

Russia: Central Bank delivers another rate cut in September and maintains dovish tone

At its 6 September meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) cut the key interest rate by 25 basis points to 7.00%, marking the third consecutive rate cut this year. The move came in line with market expectations and was driven by gradually easing inflationary pressures and lackluster economic activity.

Receding price pressures underpinned the Bank’s decision as inflation fell to a year-to-date low of 4.3% in August (July: 4.6%), while core inflation also moderated to 4.3% (July: 4.5%). Frail consumer demand and seasonal factors—chiefly due to an early harvest—underpinned the disinflationary trend in August. On top of that, households’ inflation expectations decreased slightly in August, although remained elevated nonetheless. Reflecting on the inflation dynamics, the CBR lowered its end-of-2019 annual inflation forecast from 4.2%–4.7% to 4.0%–4.5%. In the medium-term, the Bank expects inflation to hover around 4.0%, unchanged from its previous projection.

Meanwhile, despite picking up slightly from a particularly weak first-quarter outturn, growth remained soft in the second quarter, adding further pressure on the Bank to soften its policy stance. In the accompanying statement, the Bank acknowledged that growth is still coming in lower than its own expectations, chiefly driven by “weakening external demand for Russian exports on the back of a global economic slowdown as well as by weak investment activity dynamics, including government investment expenditures”. On top of that, the CBR acknowledged that “fiscal policy had a constraining effect on economic activity” in the first half of the year, leaving the Bank with little option but to cut rates.

Looking ahead, the Bank maintained a dovish tone, signaling that another rate cut is likely this year, provided inflation continues trending downwards. Notably, the Bank lowered GDP growth rate forecast for 2019 from 1.0%–1.5% to 0.8%–1.3% which implies that soft external and domestic demand conditions are set to weigh on the Russian economy in the short-term, thus likely warranting another rate cut.

Commenting on the monetary policy outlook, economists at Goldman Sachs share a dovish view:

“We believe that Russia has the largest output gap among the countries we cover and, as fiscal policy struggles to pick up and support activity, weak sequential economic growth adds to pressure on the CBR to lower rates. Second, real rates are rising once more as persistently weak sequential price growth drives down annual inflation […] Third, we think the CBR interrupted its cutting cycle last year owing to its concern about Ruble weakness […] Given the past deleveraging of external debt and with Russia now having a trade surplus net of oil exports, the Ruble is mostly a function of the growth and rate differential. Hence, we believe the CBR will continue its cutting cycle.”

The next monetary policy meeting is scheduled for 25 October.

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