Russia Monetary Policy


Russia: Central Bank leaves interest rate unchanged on rising inflation and weakening ruble

September 11, 2015

Russia’s Central Bank held its monetary policy meeting on 11 September and decided to leave the one-week repurchase rate unchanged at 11.00%. The Bank’s decision to stay put was widely expected by investors and analysts—given the recent depreciation of the ruble and the new signs of rising inflation. In fact, the Bank’s reduction in the interest rates has been steady over the course of 2015; it started the year at 17.00% and was 11.00% in July. However, higher inflation in August and the fact that the recent sharp depreciation of the Russian ruble could fuel inflation in the coming months prompted Russian monetary authorities to keep interest rates steady in September.

Looking at its assessment of the economy, the Central Bank stated that it entered into a deep recession in Q2, but that recent data suggests, “some signs of stabilization in production and consumption decline.” However, the Central Bank expects the economic slump to be more protracted than previously expected and that the new fall in oil prices, the recent volatility seen in global financial markets, as well as the rapid deterioration in the economic outlook of many other emerging economies are all factors that are likely to exacerbate the downward risks to Russia’s economic outlook. The Bank pointed out that weak domestic demand will prompt imports to decrease this year, while exports are expected grow moderately due to the weak exchange rate. As a result, the Bank concluded that net exports are likely to be the only positive contributor to overall economic growth in 2015. Regarding the evolution of consumer prices, monetary authorities said that inflation rose in August and recognized that inflation will continue rising in the coming months due to the sharp depreciation of the Russian ruble. However, the Bank stated that inflation will moderate going forward as a result of still tight monetary policy, a contraction in domestic demand and a significant fall in consumers’ real income.

In the statement, the Bank added that the economic outlook for Russia is grim. The Central Bank expects the economy to contract at a rate of between 3.9% and 4.4% this year. Going forward, Russia’s economic situation will hang on the evolution of oil prices and the economy’s capacity to absorb external shocks. In a baseline scenario, the Central Bank expects oil prices to hover around USD 50 for the next three years. Under these circumstances, the Bank foresees a more protracted decline in GDP growth. Also, weak domestic demand and what the Bank has called “relatively tough monetary conditions” will cause inflation to decrease this year and to continue to fall until 2017. The Bank signaled that inflation will fall to 7.0% in September 2016 and that it will decline to reach its inflation target of 4.0% at the end of 2017. The Bank emphasized, however, that risks to inflation persist, particularly regarding the worsening of the external economic climate, higher inflation expectations, likely revisions to regulated prices as well as the coming indexation in social payments. The Bank concluded that the next monetary policy meeting is scheduled for 30 October and that changes in its monetary policy will depend on the evolution of inflation risks and economic deterioration.

Although the majority of analysts surveyed by FocusEconomics predict further cuts in the main monetary policy rate this year—with our panel of economists expecting the one-week repurchase rate to end this year at 9.57% and 2016 at 7.48%, the Central bank is likely to reduce the pace of easing in the coming months due to rising inflation and increasing risks of deteriorating economic conditions.

Author:, Senior Economist

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Russia Monetary Policy Chart

Russia Monetary Policy September 2015

Note: 1-Week Repo rate in %.
Source: Central Bank of the Russian Federation (CBR).

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