Russia: Russian Central Bank stays put at first meeting
February 3, 2017
On 3 February, the Central Bank left the one-week repo rate at 10.00%. The decision was expected by the markets, given the Bank had given clear guidance that it did not intend to cut the interest rate in the first quarter this year, despite a continued fall in inflation. The Bank also indicated that the decline in inflation was helping inflation expectations, but this is only reflecting temporary factors, such as the strengthening of the ruble’s exchange rate and good harvest.
In its communiqué, the Bank said that inflation will continue falling throughout this year, with its forecasts suggesting that inflation will slowly fall to its 4.0% target toward the end of the year and close 2018 at that level. In terms of economic activity, the Monetary Authority recognized that last year’s recovery was somewhat better than its own expectations and estimates that quarterly GDP growth entered positive territory in the final quarter of 2016, and positive momentum carried over into the first quarter this year. Nonetheless, the Central Bank acknowledges that the recovery remains uneven across sector of the economy and regions of the country.
The monetary policy contexts has changed, following the decision by the Ministry of Finance of a temporary budget rule. Under this rule, the Ministry of Finance will purchase foreign exchange when the price of oil is more than USD 40 per barrel and sell it when the price falls below this level. This aims to build up international reserves and prevent any further appreciation of the ruble to support external competitiveness. Since the price of Urals oil is currently above USD 50 per barrel, the interventions are likely to initially lead to a depreciation of the ruble, which could prompt inflationary pressures in the near term.
The Central Bank stated that it will consider the impact of foreign-exchange interventions, and their impact on bank lending rates and liquidity. The Bank’s guidance has become more hawkish. It stated that, given the change in external and internal economic conditions, the likelihood for a reduction in the policy rate in the first half of 2017 had decreased. This suggests that the Central Bank believes that the temporary budget rule will force it to keep its policy rate at the current level for longer. The next monetary policy is scheduled for 24 March.
Author: Ricardo Aceves, Senior Economist