Russia Monetary Policy June 2018

Russia: Central Bank holds key rate unchanged in June

At its 15 June 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%. Market analysts were split on how the Bank would act, with some predicting a rate cut and others expecting the move to stay pat. The decision marked the second consecutive meeting without changes to monetary policy following a notable easing cycle that has brought the key interest rate to the lowest level since April 2014.

Recent fiscal policy changes by the government have caused upward risks to inflation to intensify and prompted the Bank to hold the key rate unchanged in June. In the accompanying statement, the Bank commented that next year’s rise in the VAT will stroke price pressures and that this could also affect inflation this year through higher expectations. The Bank estimates that the planned tax revisions could contribute 1.0 percentage points to inflation. On top of higher taxes, heightened volatility in financial markets and especially a weak ruble could also add to price pressures going forward.

Looking ahead, the Bank signaled that it will take a cautious approach to resuming interest rate cuts in light of higher taxes. The Bank stated that monetary conditions are already close to neutral and that the transition to neutral monetary policy “needs to be slower” to limit the secondary effects from the higher VAT. A key interest rate of between 6.0%–7.0% is regarded as neutral. The next monetary policy meeting is scheduled for 27 July 2018.

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