The Bank of Russia cuts the key rate by 50 bp to 6.50% p.a.
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The Bank of Russia cuts the key rate by 50 bp to 6.50% p.a.

October 28, 2019

On 25 October 2019, the Bank of Russia Board of Directors decided to cut the key rate by 50 bp to 6.50% per annum. Inflation slowdown is overshooting the forecast. Inflation expectations continue to decrease. The Russian economy’s growth rate still remains subdued. Risks of a substantial global economic slowdown persist. Disinflationary risks exceed pro-inflationary risks over the short-term horizon. In these circumstances, the Bank of Russia has lowered its annual inflation forecast for 2019 from 4.0–4.5% to 3.2–3.7%. Given the monetary policy stance, annual inflation will come in at 3.5–4.0% in 2020 and will remain close to 4% further on.

If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at one of the upcoming Board of Directors’ meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.

Inflation dynamics. Inflation slowdown is overshooting the forecast. Annual consumer price growth rate declined to 4.0% in September (from 4.3% in August 2019) and was close to 3.8% according to the estimate as of 21 October. September results show that annual core inflation also decreased to 4.0% as compared to 4.3% in August. According to the Bank of Russia’s estimates, inflation indicators reflecting the most sustainable price movements are close to or below 4%.

In September—October, disinflationary factors had a more pronounced influence on the slowdown of price growth rates than it had been estimated before. At the same, time pro-inflationary risks related to the external conditions did not materialise. Taking into account one-off factors amid a good harvest and expanded supply in individual food market segments, seasonally adjusted food price growth rates remained low. The ruble appreciation since the beginning of the year alongside with inflation slowdown in Russia’s trading partners limits the price growth of imports. In addition, the impact of subdued demand on inflation is becoming increasingly strong. Domestic demand dynamics is also affected by the persisting delay in the financing of budget expenditures, including the expenditures on national projects, compared to earlier announced plans.

In September—October, households’ inflation expectations continued to decrease, while remaining elevated. Business price expectations slightly lowered. Annual inflation slowdown paves the way for a future decline in inflation expectations of households and businesses.

The Bank of Russia has lowered its annual inflation forecast for 2019 from 4.0–4.5% to 3.2–3.7%. Meanwhile, annual inflation will be slightly below 3% in 2020 Q1 when the effect of the VAT rate hike is factored out from the calculation of annual inflation. Given the monetary policy stance, annual inflation will come in at 3.5–4% in 2020 and will remain close to 4% further on.

Monetary conditions. Monetary conditions have continued to ease since the last Board meeting. Among other things, this was driven by the change in expectations of financial market participants with regard to the Bank of Russia’s key rate path. OFZ yields and deposit and lending rates continued to decline. The Bank of Russia’s decisions to cut the key rate and the decline in OFZ yields create conditions for a further reduction in deposit and lending rates.

Real sector lending continues to grow on the back of eased monetary conditions. At the same time, annual growth in lending to households has been slowing down since June after noticeable growth in 2018 — early 2019.

Economic activity. The Russian economy’s growth rate still remains subdued. In these circumstances, the Bank of Russia keeps unchanged its 2019 GDP growth forecast in the range of 0.8–1.3%. However, current data suggests that the growth of the Russian economy might accelerate in 2019 Q3, partially driven by temporary factors.

Economic activity continues to be constrained by weakening external demand for Russian exports on the back of a global economic slowdown as well as by weak investment activity dynamics, including government investment expenditures. August-September saw continuing annual growth of industrial production; however, leading indicators point to worsening business sentiment in the industrial sector, which is mostly specific of export orders. Growth in real disposable household incomes has yet to influence the dynamics of retail trade turnover. The labour market creates no additional inflationary pressure. The fact that unemployment remains near historic lows is not driven by expanding labour demand but rather by a simultaneously contracting number of employees and the labour force.

Since the beginning of 2019, fiscal policy has had a constraining effect on economic activity. This is in part related to a slower than expected implementation of national projects planned by the Government. Going forward, the rise in government expenditures, including investment ones, and their impact on economic growth will be more distributed over time.

The Bank of Russia has left the 2019–2022 GDP growth forecast unchanged. The GDP growth rate will gradually increase from 0.8–1.3% in 2019 to 2–3% in 2022. This will be possible should the Government’s measures for overcoming structural constraints, including the implementation of national projects, be realised. However, the global economic slowdown expected over the forecast horizon will continue to exert a constraining impact on growth of the Russian economy.

Inflation risks. Disinflationary risks exceed pro-inflationary risks over the short-term horizon. This is primarily related to the weak dynamics of domestic and external demand. Disinflationary risks associated with movements in prices of certain food products persist, including on the back of a rise in supply of farm produce. Pro-inflationary risks posed by budget expenditures growth in the second half of 2019 — early 2020 hold low because the rise in expenditures is likely to be more distributed over time. At the same time, should global economic slowdown be more pronounced, including due to tightening international trade restrictions and on the back of other geopolitical factors, this might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations.

A number of internal conditions continue to pose pro-inflationary risks over a longer-term horizon. Significant risks are posed by elevated and unanchored inflation expectations. The mid-term inflation dynamics may also be affected by fiscal policy parameters, including decisions on the investment of the liquid part of the National Wealth Fund in excess of the threshold level set at 7% of GDP.

The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements and possible changes in consumer behaviour. These risks remain moderate.

If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at one of the upcoming Board of Directors’ meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.

The Bank of Russia Board of Directors will hold its next key rate review meeting on 13 December 2019. The press release on the Bank of Russia Board decision and the medium-term forecast are to be published at 13:30 Moscow time.

In the follow-up to the Board of Directors meeting of 25 October 2019 the Bank of Russia released its medium-term forecast in connection to the publication of Monetary Policy Guidelines for 2020–2022, which are to be issued on 29 October 2019.

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