Russia Monetary Policy July 2018

Russia: Central Bank holds key rate unchanged again in July

At its 27 July meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) decided to hold the key interest rate unchanged at 7.25% for the third consecutive meeting. The decision met market analysts’ expectations. Over the past two years, the Bank had embarked on a notable easing cycle amid historically low inflation that brought the key interest rate to the lowest level since April 2014. However, rising upside risks to the inflation outlook led the Bank to pause its easing cycle in April.

Although inflation is currently below the Bank’s 4.0% target, a planned hike in the value added tax at the start of 2019 will stoke price pressures and prompted the Bank to keep the key rate unchanged in July. In the accompanying statement, the Bank commented that it sees inflation temporarily overshooting its target at the start of next year due to the rise in the VAT, before returning to 4.0% in 2020. The Bank also added that risks to the inflationary outlook are tilted towards higher price pressures as uncertainty lingers over the full effects of higher taxes, while volatile global financial markets could weigh on the ruble.

Looking ahead, the Bank signaled that it will take a cautious approach to resuming interest rate cuts. The Bank stated that monetary conditions are already close to neutral and that the transition to neutral monetary policy will likely take place in 2019, suggesting that the key rate will remain on hold for the rest of the year. A key interest rate of between 6.0%–7.0% is regarded as neutral. The next monetary policy meeting is scheduled for 14 September 2018.

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