The Board of Directors of the Bank of Russia on 9 February 2018 decided to lower its key rate by 25 b.p. to 7.50% per annum. About it reports a Press-service of the Bank of Russia.
Inflation is at 2.5% and will gradually approach 4% by the end of 2018, the statement of the Central Bank. The extension of the agreement to limit oil production reduces proinflationary risks on the horizon. With this in mind, the Bank of Russia lowered the key rate by 50 basis points. While the medium proinflationary risks outweigh the risks of sustainable inflation deviation from the target down. The Bank of Russia will continue to move from moderately tight to a neutral monetary policy gradually.
Deciding on the key rate, the Bank of Russia will assess the balance of risks substantial and sustained deviations of inflation above and below target, as well as the dynamics of economic activity in relation to the forecast. The Bank of Russia admits the possibility of some reduction in the key rate in the first half of 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 is below 3%, mainly influenced by temporary factors. Assessment, on December 11, 2017, it was 2.5%.
In the IV quarter of 2017 downward pressure on the growth rate of consumer prices continued to provide increased volume of supply on the market of agricultural products, which are associated with the growth of productivity, lack of warehouse capacity for storage. As a result, in November the annual food inflation dropped to 1.1%. The majority of factors associated with the harvest of 2017, will cease to exert a disinflationary effect in the first half of 2018. The contribution of exchange rate dynamics in a slowdown in the annual inflation rate is decreasing and will be exhausted in the first quarter of next year.
A continuing decline in the annual growth rate of prices for nonfood goods, which amounted to 2.7% in November. At the same time, services have risen over the year by 4.2%. Most of the indicators of annual inflation, reflecting the most sustainable processes of price dynamics, the Bank of Russia’s estimates are slightly below 4%.
The deceleration of inflation contributed to lowering of inflation expectations, which, however, remains fragile and uneven. For anchoring of inflation close to 4% will not only further decrease in inflationary expectations, but also reducing their sensitivity to changes in prices.
Annual inflation is less than 3% at the end of 2017 and as exhaustion effects and temporary factors will gradually approach 4% by the end of 2018.
The monetary conditions. The decision on the key rate and the potential for its further reduction will contribute to further easing of monetary conditions, creating preconditions for the approximation of inflation to 4%. Nominal interest rates on banking operations continue to decline, and in real terms remain positive. Non-price lending conditions is gradually softened to the most reliable borrowers, but remain deterrent.
As we move to a neutral monetary policy will continue to change the shape of the yield curve from inverted to normal. In these circumstances, the potential to reduce short-term rates more than long-term.
Current conditions continue to contribute to the preservation of the attractiveness of the savings and ensure a balanced growth of consumption. These trends will continue amid further gradual easing of monetary policy and the low risk appetite from banks and borrowers.
Economic activity. According to Bank of Russia estimates, the growth rate of economy by the end of 2017 will be close to potential and will make 1,7-2,2%. Thus, the monetary conditions to form a low inflationary pressures and limiting economic growth. Although in October the heterogeneity of observed trends in economic activity, the mood of producers are still at a relatively high level. In the future they will support the growth of domestic demand against the backdrop of increasing real wages and a slowdown in global growth. Unemployment is at levels that do not create excessive inflationary pressure.
Considering the extension of the agreement to limit oil production, the Bank of Russia increased the forecast of GDP growth in 2018 compared to the previous baseline. However, the mid-term evaluation of the development prospects of the Russian economy has not changed. Economic growth will not exceed 1.5-2.0% throughout the forecast horizon, which corresponds to current estimates of their potential.
Inflation risk. 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 situation in the labour market, possible changes in consumer behaviour, the nature of inflation expectations.
The extension of the agreement by the countries — exporters of oil reduces the uncertainty of the dynamics of energy prices and related proinflationary risks on the horizon. The risks of deviation of inflation, up from the forecast continue to prevail in the medium term. 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.
Deciding on the key rate, the Bank of Russia will assess the balance of risks substantial and sustained deviations of inflation above and below target, as well as the dynamics of economic activity in relation to the forecast. The Bank of Russia will continue to move from moderately tight to a neutral monetary policy gradually and allows for the possibility of some reduction in the key rate in the first half of 2018.
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 February 9, 2018. The time of publication of the press release about the decision of the Board of Directors of the Bank of Russia — 13:30 Moscow time.