Bank of Russia Signals No Early Reduction of Elevated Interest Rate

March 14, 2014

In an emergency meeting on March 3rd, Bank Rossii officials raised the Russian one-week repo rate by 150 basis points to 7.0%.  Although today’s scheduled meeting did not tighten the policy stance additionally, it explained that a near-term cut is not going to happen.

High inflation risks that brought about an increase in the key rate on 3 March 2014 still remain. Unstable external conditions and a rise in financial market volatility are conducive to an increase in economic uncertainty.  Against this backdrop the Bank of Russia‚Äôs priority is to contain the effect of exchange rate dynamics on inflation and to maintain financial stability. Hence, the Bank of Russia does not intend to lower the key rate in the coming months.

Left unsaid is that the source of the uncertainty lies with the Kremlin in whose power the crisis in Ukraine lies.  Core inflation did not fall in February, and ruble depreciation means that inflation is unlikely to crest before mid-2014 despite slower growth.  Tight monetary policy will promote falling inflation thereafter, and officials are confident that in-target inflation can be achieved in the medium run.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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