Russia Monetary Policy December 2019

Russia: Central Bank trims key policy rate to near six-year low in December

At its 13 December meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) cut the key interest rate by 25 basis points to 6.25%, the lowest level since January 2014. The move, which marked the fifth consecutive rate cut this year, came in line with market expectations and was driven by slowing inflation and lackluster activity growth.

Inflation again undershot forecasts in October (3.8%) and November (3.5%) and moderated further to 3.4% in the first week of December, according to preliminary estimates, thus prompting the CBR to maintain its current monetary policy easing cycle. Declining annual growth in food prices owing to a bumper harvest and rising food supply continued to underpin the disinflationary trend in recent months, further reinforced by a stronger ruble, lackluster domestic and external demand, and subdued import price growth. Against this backdrop, and taking into account decreasing households’ inflation expectations, the CBR confirmed its forecasts of inflation slipping below 3.0% in Q1 2020, before bouncing back and ending 2020 at 3.5%–4.0%.

With regards to growth, the CBR was cautious over the near-term outlook, despite the stronger-than-expected expansion in Q3. Whereas the Bank expects growth to clock in closer to the upper bound of its 0.8%–1.3% projection, it noted that weak business sentiment in the industrial sector and weakening external demand for Russian exports continue to weigh on the overall expansion. As such, the CBR left its GDP growth rate forecast for 2020 unchanged at 1.5%–2.0%.

Looking ahead, whereas the Bank kept a largely dovish tone, it noted that it will likely pause monetary policy easing in the coming months. That said, with core inflation likely undershooting the CBR expectations in the coming months amid feeble GDP growth, rates are still likely to be cut early in 2020, as noted by Anatoly Shal, an economist at JPMorgan:

“Despite the more cautious messaging from the CBR and the apparent hesitance to move below 6.00%, we continue to expect two further cuts in 1H20, in February and April (core meetings). […] Monetary authorities may need to heat up the economy a bit to move the underlying inflation up, especially as imported inflation remains very low. The fiscal policy will likely provide only a modest stimulus next year and CBR’s hand will be needed. […] The recent RUB appreciation, if sustained, can strengthen the argument. By 2H20, the projected pick up in global growth and discussions around budget planning for 2021 (election year) will likely leave less room for monetary easing by the always-cautious CBR.”

The next monetary policy meeting is scheduled for 7 February.

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