Russia Monetary Policy October 2019

Russia: Central Bank slashes key policy rate to over five-year low in October

At its 25 October meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) trimmed the key interest rate by 50 basis points to 6.50%, the lowest level since January 2014. The move, which marked the fourth rate cut this year, came broadly in line with market expectations and was driven by receding inflationary pressures and feeble economic activity growth.

A faster-than-expected slowdown in inflation was largely behind the Bank’s decision. Inflation fell to a 10-month low of 4.0% in September (August: 4.3%) and eased further to 3.8% in the first three weeks of October, according to preliminary estimates. A bumper grain harvest and rising food supply underpinned the disinflationary trend in September–October, with a strong ruble and subdued domestic demand adding further downward pressure. This, coupled with a sustained decline in households’ inflation expectations, led the CBR to trim its end-of-2019 annual inflation forecast from 4.0%–4.5% to 3.2%–3.7%. Notably, the Bank sees inflation slipping below 3.0% in Q1 2020, before bouncing back and ending 2020 at 3.5%–4.0%.

Meanwhile, growth appears to have remained lackluster in Q3, despite a likely upturn from Q2, partially driven by temporary factors. In its communiqué, the Bank highlighted that soft external demand and subdued investment activity continue to curb overall growth, while also acknowledging that “fiscal policy has had a constraining effect on economic activity” which was chiefly “related to a slower than expected implementation of national projects planned by the government”. As such, the CBR left its GDP growth rate forecast for 2019 unchanged at 0.8%–1.3% and set the forecast for 2020 at 1.5%-2.0%.

Looking ahead, the Bank kept a dovish tone, signaling its monetary policy easing cycle should be sustained next year. Inflationary risks are expected to stay at bay, amid weak domestic and external demand dynamics. That said, rate cutting in 2020 is unlikely to be as aggressive as this year, as noted by Anatoly Shal, an economist at JPMorgan:

“The CBR opted to deliver a larger 50bp cut at today’s meeting, dispelling a notion that it tends to move slowly and prefers to err on the side of caution. Judging by the text of the statement, the main reason for the bolder move was lower than expected actual inflation and re-assessment of near-term inflation risks by the board. […] Despite the dovish tone around inflation dynamics, the sentence on the policy outlook actually sounded cautious—the CBR will consider “necessity” of further cuts at upcoming meetings—which, other things equal, implies a higher probability of a near-term pause or at least not as aggressive pace of easing. Perhaps, the board sees the larger move today as enough to make the policy not as behind the curve.”

The next monetary policy meeting is scheduled for 13 December.

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