Russia Monetary Policy February 2020

Russia: More dovish Central Bank cuts key policy rate for sixth consecutive time

At its 7 February meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) trimmed the key interest rate by 25 basis points to 6.00%, the lowest level since January 2014. The move, which marked the sixth consecutive rate cut since the Bank unleashed monetary policy easing cycle in June 2019, was supported by retreating inflationary pressures and still-frail economic activity growth.

The rate cut came against the backdrop of swiftly receding price pressures. Headline inflation fell to 2.4% in January from 3.0% in December, marking the lowest result since June 2018. Inflation decelerated faster than the Bank had expected chiefly due to slowing food price growth, as well as due to the effect of the VAT rate hike a year prior. The CBR noted that subdued domestic and external demand, coupled with a strong ruble, also curbed price pressures. Against this backdrop, and reflecting on households’ and businesses’ largely stable inflation expectations, the CBR confirmed its forecasts of inflation ending 2020 at 3.5%–4.0%.

Looking forward, the Bank’s tone turned more dovish in February, reversing its previous guidance which had suggested it would likely pause monetary policy easing in the first half of 2020. According to the CBR, “disinflationary risks still exceed pro-inflationary risks over the short-term horizon” amid weak domestic and foreign demand as well as downbeat consumer and business sentiment. On top of that, the Bank noted that “the implementation of additional social measures announced in January will not have a considerable pro-inflationary impact”. With regards to growth, the CBR remained cautious over the near-term outlook, despite the pick-up in activity in the second half of 2019. As a result, the CBR left its GDP growth rate forecast for 2020 unchanged at 1.5%–2.0%, subject to successful implementation of the “national projects” program.

Commenting on the decision, Dmitry Dolgin, chief economist at ING noted:

“A strong dovish shift in the monetary policy approach suggests Bank of Russia may now tolerate some decline in the real rate, and the temporary slump in the Russian CPI expected in the near-term is providing a window of opportunity for an additional 50 bp decrease in the key rate in 1-2Q20, being a positive driver for the bond market and more or less neutral for RUB. A moderate decline in the rates is justified by the cross-country comparison and should not result in a deterioration in the macro stability. Meanwhile, central bank independence in the face of a more growth-focused cabinet will remain a watch factor from now on. Future CBR reaction to a possible change in the CPI outlook […] will be an important indicator of monetary policy priorities.”

The next monetary policy meeting is scheduled for 20 March.

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