Russia: Russia's Central Bank holds interest rates unchanged
April 29, 2016
Following a meeting of its Board of Directors on 29 April, Russia’s Central Bank announced its decision again to leave the one-week repo rate unchanged at 11.00%. The decision was in line with market expectations after the Central Bank warned in its previous meeting that it may carry out a tight policy for a longer period than had been expected earlier.
In making the decision to leave the interest rate unchanged, the Central Bank indicated that it took into consideration the current macroeconomic environment. According to the Bank, inflation continues to slow and inflation expectations are gradually falling due to a weak domestic demand scenario. The Bank added that temporary factors, namely the government’s recent indexation of wages, pensions and tariffs, as well as lower global food prices have contributed to reduce inflationary pressures. Nonetheless, high risks to inflation persist in the form of uncertainty regarding the parameters of further indexation of wages and pensions; a lack of a clear strategy to consolidate the budget in the near term; the persisting global oil glut with a potential of a renewed plunge in oil prices; and its negative implications for the Russian ruble and inflation expectations.
Regarding economic activity, the Bank reckoned that recent macroeconomic data have shown that the economy is more resilient to external headwinds, such as fluctuations in oil prices and global financial volatility. According to the Bank, the floating exchange rate is acting as a shock absorber against external headwinds and import substitution—in the wake of international sanctions and restrictions to imports imposed by the government—together with less of a dependence on commodity exports are contributing positively to industrial production dynamics. This prompted the Central Bank to recognize that, “the ongoing shifts in the economy anticipate the beginning of its recovery growth. Quarterly GDP growth is expected to reach positive territory in 2016 H2 — early 2017.”
This is the sixth consecutive meeting in which Russian monetary authorities kept the interest rate at 11.00%, shrugging off calls from businesses and policy makers to cut rates in order to lower borrowing costs amid a protracted economic recession. Nonetheless, a majority of analysts agree that by leaving interest rates unchanged in April, the Central Bank would prove its commitment to target inflation. Highlighted at the end of the statement, the Central Bank pointed out that authorities may resume a gradual lowering of the main policy rate at one of their upcoming meetings, should inflation risks abate as to ensure the Bank is on track to achieve its inflation target. The Bank’s next monetary policy meeting is scheduled for 10 June.
Author: Ricardo Aceves, Senior Economist