Bank of Russia keeps key rate unchanged, expects inflation to decelerate to 4 pct by end-2017

As widely expected, the Bank of Russia today decided to maintain the key interest rate 10 percent. The central bank’s board of directors indicates that inflation has been performing consistent with the forecast and that inflation expectations are reducing gradually. The Board also stated that the Russian economy is rebound faster than anticipated earlier. But the slower growth of consumer prices is partly due to temporary factors, according to the Bank of Russia statement.

The purchases/sales of foreign currency in the foreign exchange market that the Russian finance ministry plans to carry out under a transitional budget rule, would not bring significant inflation risks given the central bank’s sticks to its moderately tight monetary policy.

Russia’s annual inflation continues to drop in line with the Bank of Russia’s projection. This is partly because of temporary factors such as the ruble exchange rate and 201 6’s heavy crop. In December, prices of stable goods and services had decelerated further. The estimates as of 30 January indicate that annual consumer price growth slowed to 5.1 percent from 5.4 percent in 2016.

Domestic demand continues to put a disinflationary effect. Consumers are retaining their savings behaviour model, although their confidence has improved. The Russian central bank’s projection implies that given today’s decision and extension of moderately tight monetary policy, annual inflation is expected to decelerate to the target rate of 4 percent by the end of 2017 and remain close to this level in the sequel.

According to the Bank of Russia’s statement, the propensity to save and secure sustainable inflation deceleration driven by demand-side restrictions, monetary conditions should stay moderately tight. It will also aid in further bringing down the inflation expectations of businesses and households. Positive real interest rates would be kept at the level that would safeguard demand for loans without raising inflationary pressure and uphold incentives for saving.