Central Bank of Russia expects inflation to slow further; conditions for further rate cuts evident

A cautious monetary policy was pursued by the Central Bank of Russia in the second half of 2015. The rate reduction cycle was put on hold. It wanted to wait and watch if inflation would decelerate significantly in line with its forecasts. Inflation in Russia has alleviated markedly. Inflation slowed to 7.2 percent in the month of July, as compared with November’s print of a shocking 15 percent.

Core inflation in the nation had also slowed to a similar degree. But whether the Central Bank of Russia’s projections would be confirmed still remains to be seen, said Commerzbank in a research note. The Russian central bank expects inflation rate to reach 6 percent by the end of 2016 and anticipates it to slow to 4 percent by late 2017. In spite of the marked decline in inflation, these anticipations by the central bank seem too optimistic as the statistical base effects have ended.

Meanwhile, the Russian central bank had begun cutting rates again. It reduced the key rate to 10.50 percent from 11 percent in mid-June. The conditions for additional rate cuts are quite evident. Inflation has slowed markedly and the central bank has gained quite a lot of credibility on the markets with its approach, noted Commerzbank. This signifies that calculated rate cuts are not expected to exert strong pressure on the Russian ruble, especially as real interest rates have risen markedly in recent times.