The Bank of Russia lowered the key rate to 8.50% per annum




The Board of Directors of the Bank of Russia on 15 September 2017 has decided to reduce the key rate by 50 b.p. to 8.50% per annum. The Board of Directors noted that inflation is close to 4%, and the economy continues to grow. On the background of favorable dynamics of prices of some goods and services resumed the decline in inflation expectations, but they are not yet entrenched at a low level. Medium-term risks of exceeding the inflation targets outweigh the risks of sustainable inflation deviation down. To maintain inflation close to 4%, the Bank of Russia will continue carrying out moderately rigid monetary policy.

On the horizon the next two quarters, the Bank of Russia admits the possibility of lowering the key rate. Deciding on the key rate, the Bank of Russia will be based on the risk assessment substantial and sustained deviations of inflation from the target, and the dynamics of consumer prices and economic activity in relation to the forecast.

The Board of Directors of the Bank of Russia, taking the decision on the key rate, based on the following:

Dynamics of inflation. Inflation is near 4%. After rising to 4.4% in June, inflation in August was 3.3%. Continuing the reduction of inflation in the market of nonfoods, prices for services have stabilized around 4%. There is a high homogeneity of inflation for the consumer basket. Slowing growth in food prices due to seasonal cheapening of fruits and vegetables, which was stronger than the preliminary estimates.

According to the formation of low inflation, the contribution of volatile components, which, in particular, include prices for fruits and vegetables, the total change in the consumer price index becomes more visible. Conjunctural factors for 2018 will lead to the fact that inflation can be both above and below 4%. Pronounced changes in prices for commonly purchased by the population goods and services are fairly quickly reflected in the dynamics of inflation expectations. To maintain inflation close to 4% will decrease the sensitivity of inflation expectations to changes in the pricing environment.

The monetary conditions. Monetary conditions continue to support the propensity of people to save against the backdrop of increasing economic activity and a recovery of current income. Rates on Bank transactions in real terms remains positive. While nominal lending rates continue to decline under the influence as earlier, and expected by market participants to reduce the key rate. Banks soften non-price credit conditions selectively, continuing to carefully select borrowers. The conservative approach of the banks, coupled with a moderately tight monetary policy contributes to the formation of the conditions necessary for anchoring inflation around 4% and a further decline in inflation expectations.

Economic activity. The increase in GDP in the second quarter exceeded forecast estimates. Support economic growth provided the investment and consumer demand and the rebuilding of inventories. The increase in consumer demand in the current monetary conditions does not create significant inflationary risks in the expanding supply of goods and services. In the second quarter continued the growth of manufacturing output began to increase construction work. A significant contribution to the growth of the economy has made trade, mining. In some sectors the growth acceleration was associated with a sustained and one-off factors, which influence in the second half are likely to decrease, which is partly confirmed by the statistics in July. Considering the positive dynamics in the II quarter forecast of GDP growth by the end of 2017, upgraded to 1.7 and 2.2%.

The estimate by the Bank of Russia of the trajectory of economic development in the medium term remains the same. The economy is near its potential level. The constraints on economic growth could be a shortage of production capacity, as well as the situation on the labour market where there is a shortage of qualified personnel in certain segments. In the future, the pace of GDP growth above 1.5-2% per year would be achievable if the structural reforms.

Inflation risks. Medium-term risks of inflation exceeding 4% outweigh the risks of sustainable inflation deviation down from 4%.

In the next six months the fluctuations of food prices will remain a source of volatility in inflation. The dynamics of food prices will depend on the quality and safety of the crop. Short-term factors related to the food market, can lead to a temporary deviation of inflation both up and down from 4%, but it will not be sustainable.

The main sources of medium-term inflationary risks have not changed. First, they are related to possible price fluctuations on the world raw materials and commodity markets. The implementation of fiscal rules would help to mitigate the risks associated with the dynamics of oil prices. Second, the increasing structural shortage of labor resources may lead to significant delays in the rate of productivity growth from wage growth. Third, a source of inflationary pressure may be the change of behaviour of households associated with a significant reduction in the propensity to save. Fourthly, there remains an increased sensitivity of inflation expectations to price changes for individual groups of goods and services and exchange rate dynamics.

Taking into account these factors for anchoring inflation close to target would require the preservation of a moderately tight monetary conditions.

On the horizon the next two quarters, the Bank of Russia admits the possibility of lowering the key rate. Deciding on the key rate, the Bank of Russia will be based on the risk assessment substantial and sustained deviations of inflation from the target, and the dynamics of consumer prices and economic activity in relation to the forecast.

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 27 October 2017.



The Bank of Russia lowered the key rate to 8.50% per annum 15.09.2017

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