Russia Monetary Policy September 2020

Russia: Central Bank pauses interest rate cuts in September

At its meeting on 18 September, the Board of Directors of the Central Bank of the Russian Federation (CBR) kept the key interest rate at a record low of 4.25%. The decision marked a pause in the Bank’s monetary policy easing cycle, with the latest 25-basis-point cut delivered in July, and was chiefly driven by intensifying inflationary pressures, a sinking ruble and a faster-than-expected rebound in economic activity.

Price pressures overshot expectations in recent months, in turn spearheading the Bank’s decision to stand pat in September. Inflation rose to 3.6% in August (July: 3.4%), bolstered by improving domestic demand after the easing of lockdowns, and due to a weaker ruble amid elevated volatility in global markets and higher geopolitical risks. Meanwhile, a softer-than-expected Q2 contraction in GDP and a quicker-than-projected rebound in high-frequency Q3 economic activity amid upbeat consumer demand also supported the Bank’s move. Lastly, improving monetary conditions—loan and deposit rates largely declined while lending expansion continued—further cemented the decision.

In its communiqué, the CBR maintained its dovish tone and confirmed its readiness to slash rates further by the end of this year if necessary, noting that “although the effect of short-term pro-inflationary factors has strengthened, disinflationary risks still prevail in the medium run”. The Bank now expects inflation to end this year between 3.7% and 4.2%. In 2021, it sees inflation hovering in the range of 3.5% and 4.0% before stabilizing close to 4.0% in 2022. With regard to GDP, the CBR expects the “increase in economic activity [to] continue in a more gradual manner […] once the first stage of economic recovery growth has petered out”. As such, the Bank made no changes to its GDP forecast: The economy is projected to shrink by 4.5–5.5% in 2020.

Commenting on the monetary policy outlook, Anatoliy A Shal, economist at JPMorgan, noted:

“The board preserves a dovish bias and once geopolitical noise subsides and inflation momentum moderates (as we expect), it would be ready to cut the policy rate a little more. We think that our forecast for another 50bp in cuts remains sensible, especially as we think that inflation will undershoot the CBR’s expectations significantly next year (3.1% vs. 3.5-4.0%). Yet, the timing of cuts could be more back-loaded vs. our current expectations – the board may want to see US election uncertainty cleared before acting. We keep our call for an October cut for now, but admit it is a toss-up and the next cut could easily be delayed into December.”

The Bank of Russia will hold its next key rate review meeting on 23 October 2020.

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