The Board of Directors of the Bank of Russia on 9 February 2018 decided to lower its key rate to 7.50% per annum,according to a press release of the regulator.
Annual inflation remains at a stable low level. Inflation expectations are gradually falling. Preinflation short-term risks have subsided. In this regard, the balance of economic and inflation risks have shifted towards risks to the economy. Increased uncertainty about market conditions in global financial markets. The likelihood of exceeding the annual inflation of 4% this year, significantly decreased. In these circumstances, the Bank of Russia will continue the reduction of the key rate and allows for the completion of the transition from moderately rigid to a neutral monetary policy in 2018.
The Board of Directors of the Bank of Russia, taking the decision on the key rate, proceeded from the following.
Dynamics of inflation. Annual inflation remains at a stable low level. It was 2.2% in January 2018. Along with temporary factors contribution to the further slowdown of consumer prices and contributing factors of permanent actions. The influence of a constant force on the dynamics of inflation may be more significant than previously estimated.
In January 2018 and decreased the annual rate of growth of consumer prices in all major groups of goods and services. Food inflation slowed to 0.7%, inflation on non-food market fell to 2.6%, the growth rate of prices for services was 3.9%. Most of the indicators of annual inflation, reflecting the most sustainable processes of price dynamics, the Bank of Russia estimates, are below 4%.
Downward pressure on food inflation continued to provide increased volume of supply on the market of agricultural products. Most of the factors from the yield of 2017 will cease to exert a disinflationary effect in the first half of 2018. At the same time, investment in agriculture and improve the technological level of the industry create conditions for sustainable increase of its productive capacity in the medium term. The contribution of exchange rate dynamics of recent months, slowing the annual inflation rate will be exhausted before the end of the first quarter of this year.
The deceleration of inflation contributed to lowering of inflation expectations, which, however, remains fragile and uneven. This requires not only the further decline in inflation expectations, but also reducing their sensitivity to changes in prices.
The slowdown in the annual growth of consumer prices may continue in the first half of 2018, partly due to a high base effect last year on food inflation. According to the forecast of the Bank of Russia, annual inflation will remain below 4% in 2018, and will be close to that level in 2019.
The monetary conditions. Monetary conditions in 2017, gradually softened. The main contribution to the mitigation of the introduced dynamics of interest rates. While real interest rates remain in the positive region, which contributes to the attractiveness of the savings. Non-price credit conditions are still constraining banks are still conservative approach to the selection of borrowers and increase lending volumes and continued high-risk on the borrowers ‘ side. Credit restoration does not create proinflationary risks.
The decision on the key rate and the potential for its further reduction will contribute to further easing of monetary conditions, which create prerequisites for the approximation of the annual inflation rate to 4%, supporting the growth of domestic demand.
As we move to a neutral monetary policy will continue the process of normalization of the shape of the yield curve. In these circumstances, the potential to reduce short-term rates more than long-term.
Economic activity. In the fourth quarter of 2017, slowed down economic activity, but there is some uncertainty in the assessment of the reasons for this slowdown, including the role of temporary factors.
After a decline in industrial production in November 2017, the growth rate of output in December 2017 resumed in monthly terms. Mood manufacturers remain at relatively high level. In the future they will support the growth of domestic demand against the backdrop of increasing real wages and the growth of the world economy. Unemployment is at levels that do not create excessive inflationary pressure.
Inflation risk. Preinflation short-term risks have subsided. In this regard, the balance of economic and inflation risks have shifted towards risks to the economy. Increased uncertainty about market conditions in global financial markets. The likelihood of exceeding the annual inflation of 4% this year, significantly decreased. In these circumstances, the Bank of Russia will continue the reduction of the key rate and allows for the completion of the transition from moderately rigid to a neutral monetary policy in 2018.
Assessment by the Bank of Russia medium-term risks to the inflation dynamics have not changed significantly.
A number of factors can simultaneously carry risks of deviation of inflation both up and down from the target depending on the situation. These include the dynamics of food and oil prices, which are characterized by high volatility. The implementation of fiscal rules to smooth out the impact of the oil market on inflation and domestic economic conditions in General. At the same time, some factors created mainly proinflationary risks: the development of the situation in the labour market, possible changes in consumer behaviour, the nature of inflation expectations.
In the medium term (2019-2020) the risks of deviations of annual inflation up from 4% continue to outweigh the risks of deviation of inflation down. First, the increasing structural shortage of labor resources may lead to significant delays in the rate of productivity growth from wage growth. Second, a source of inflationary pressure may be the change of behaviour of households associated with a substantial decrease in the propensity to save. Third, inflation expectations remain elevated and subject to oscillations under the influence of price changes for individual groups of goods and services and exchange rate dynamics. In addition, the medium-term balance of risks for inflation dynamics will depend on the prospects of the budget and tariff decisions in 2019-2020. The Bank of Russia will monitor risks from external factors throughout the forecast horizon.
The next meeting of the Board of Directors of the Bank of Russia, which will address the issue of the level of the key rate, scheduled for March 23, 2018.