POST Online Media Lite Edition


Russia cuts key interest rate to 8.5%

Staff Writer |
The Bank of Russia lowered its benchmark one-week repo rate by 50bps to 8.5 percent on September 15th, as widely expected, due to a quicker-than-expected slowdown in inflation.

Article continues below

Policymakers also said that there is still room for further rate cuts over the next two quarters.

Information Notice of Bank of Russia:

"Inflation stays close to 4%. In August, inflation totalled 3.3% following a short-lived rise to 4.4% in June.

"Inflation continues to decline in the non-food goods market; services price growth has stabilised around 4%.

"High homogeneity of inflation is maintained for consumer basket and across regions. Food price growth decelerates due to the seasonal cheapening of vegetables and fruit, which has exceeded preliminary estimates.

"As inflation becomes lower, the contribution of volatile components, consisting of vegetable and fruit prices, among other things, to the general movement of the consumer price index becomes more pronounced. During 2018 short-term factors may cause inflation to deviate from the 4% both to the upside and to the downside.

"Noticeable changes in the prices for the consumer goods and services most often purchased by the population feed through to inflation expectations dynamics rather quickly. To keep inflation close to 4%, it is necessary to make inflation expectations less sensitive to price movements.

"Monetary stance continues to support household propensity to save amid elevated economic activity and recovery in current incomes.

"Real bank rates remain in positive territory. Nominal lending rates continue to decline influenced by earlier key rate cuts, as well as those expected by market participants.

"Banks tend to ease non-price lending conditions on a case-by-case basis and continue to thoroughly select borrowers. Conservative approach employed by banks, coupled by moderately tight monetary policy, shapes conditions required for anchoring inflation close to 4% and for the further reduction in inflation expectations.

"In Q2, GDP growth exceeded the forecast figures. Economic growth was spurred by investment and consumer demand along with the recovery of production inventories.

"Higher consumer demand under current monetary conditions does not pose significant inflation risks amid the expanding supply of goods and services. Q2 saw further growth in manufacturing output; construction began to rise.

"Trade, mining and transport made a major contribution to the accelerating economic growth.

"Certain industries experienced faster growth due to both persistent and one-off factors that will most likely have less influence during the next six months, which is in part supported by July statistics.

"In view of the positive trend set by Q2, the forecast for GDP growth in 2017 has been revised upwards to 1.7-2.2%.

The Bank of Russia’s assessment of the medium-term economic development remains the same.

"The economy is close to its potential. Growth might be constrained by insufficient production capacity together with the possible skilled labour shortages affecting certain segments of the labour market.

"Further GDP growth above 1.5-2% a year is attainable if structural reforms are put in place.

"Key sources of medium-term inflation risks remain unchanged. First, there are potential price fluctuations in global commodity markets.

"Implementation of the budget rule will reduce risks linked to oil price movements. Second, labour productivity growth may lag considerably behind the wage growth as the structural shortage of labour force aggravates.

"Third, inflationary pressure may stem from changes in households’ behaviour as the propensity to save becomes much lower.

"Fourth, inflation expectations remain highly sensitive to changing prices for individual groups of goods and services and exchange rate movements."

What to read next

Bank of Russia surprises with rate cut to 9.75%
Russian central bank cuts key rate to 10.5%
Inflation rate in Russia to be 7-7.5 percent