Russia Monetary Policy October 2018

Russia: Central Bank leaves key rate unchanged in October

At its 26 October meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) decided to leave the key interest rate unchanged at 7.50%, matching market analysts’ expectations. The Bank unexpectedly hiked the key rate at its previous meeting, reversing course after an over two-year easing cycle due to mounting inflationary pressures and a weak ruble.

Elevated price pressures drove the Bank’s decision to hold rates as the weak ruble caused inflation to rise in recent months. Moreover, inflation is seen remaining elevated going forward as a planned VAT increase stokes price pressures at the start of 2019. That said, financial markets have stabilized somewhat in recent weeks and inflation should only spike temporarily, limiting the need for further tightening. The Bank contented that it sees inflation peaking in the first half of 2019 before easing to 5.0-5.5% by the end of 2019 and falling further in 2020.

Looking ahead, the Bank signaled that it will continue to take a cautious stance and that rates could be tightened further if deemed necessary. The CBR stated that inflation risks are titled to the upside, although left its assessment of risks unchanged from the previous meeting. Elaborating on the outlook for monetary policy, Dmitry Dolgin, chief Russia economist at ING, commented:

“For now, we expect the key rate to remain unchanged until the end of 2019, but this view relies on Russia’s ability to keep inflation within 6.0% yoy during 1H19 and 5.5% yoy by the end of 2019 – which the Central Bank has indicated as the upper forecast range. This forecast incorporates the effect of the upcoming VAT hike from 18% to 20% and the pass-through effect of the recent ruble depreciation.”

The next monetary policy meeting is scheduled for 14 December.

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