Russia Monetary Policy March 2016


Russia: Interest rates remain unchanged and Bank may keep tight policy longer

March 18, 2016

After having cut interest rates by 600 basis points during 2015, Russia’s Central Bank decided to leave the one-week repo rate unchanged at 11.00% again at its 18 March policy meeting. The Bank’s announcement, which was broadly expected, represented the fifth consecutive decision to maintain the interest rate at that level.

The Central Bank highlighted that inflation risks remain high despite the current stabilization in financial markets—particularly the in the foreign exchange market—a rally in commodities prices and a slowdown in inflation. According to the Bank, these risks, “stem from the current developments in the oil market, persistently high inflation expectations and some uncertainties surrounding budget configuration.” Subsequently, the Bank emphasized that although oil prices are rising and the ruble is strengthening, the accumulated weakness in the Russian currency between the end of 2015 and beginning of 2016 added inflationary pressures on the economy, which contributed to increasing inflation expectations.

In making the decision to leave interest rates unchanged in March, the Bank stated that it had taken into account the current macroeconomic scenario. According to the Bank, the present macroeconomic fundamentals suggest a less severe downturn as oil prices continue to stabilize and the floating exchange-rate regime is partially serving as a cushion to absorb negative external shocks on the economy. The weakening of the ruble has resulted in a gain in competitiveness for Russian exports and a boost to growth for individual industries, in particular export-oriented industries. Meanwhile, the Central Bank cut its forecasts for oil prices for this year from an average of USD 50 per barrel to an average of USD 30 per barrel. The Bank sees oil prices gradually rising to USD 40 per barrel in 2018. Under this scenario, the Bank sees a deeper-than-expected recession this year. Following the worst economic downturn since 2009, the Bank expects the economy to contract at a rate of between 1.3% and 1.5% this year. It sees economic growth at close to zero in 2017 and then expects it to start to expand in 2018.

Should oil prices stay low this year, high inflation expectations persist, global food prices rise and uncertainties regarding the balancing of the federal budget remain, the monetary authorities concluded that, “to enable the accomplishment of inflation targets, the Bank of Russia may conduct its moderately tight monetary policy for a more prolonged time than previously planned.”

The vast majority of the group of analysts FocusEconomics surveyed this month predict that the Central Bank will cut interest rates both this year and in 2017. Our panel of economists expects the one-week repurchase rate to end 2016 at 8.31% and 2017 at 7.05%.

Author:, Senior Economist

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Russia Monetary Policy Chart

Russia Monetary Policy March 2016

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

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