Another Step Made in the Unwinding of Last Year’s Russian Monetary Tightening

July 31, 2015

Russia is grappling with a bad case of stagflation that combines a deepening recession with inflation that’s above 15% and still cresting.  The ruble’s vulnerability magnifies the central bank’s difficult task balancing these two extremes.  The emphasis in 2014 was on fighting inflation, but in 2015 officials have switched the stress back to growth.  In 2014, the Bank of Russia’s key interest rate was raised 1150 basis points to 17%, with over half that tightening happening in November and December.  This year has seen five rate cuts totaling 600 basis points, but the latest of 50 basis points announced today as the smallest of the five reductions and accompanied by a statement whose forward guidance introduces a note of caution regarding scope for additional rate cuts.

The Bank of Russia Board of Directors decided to reduce the key rate from 11.50 to 11.00 per cent per annum, taking into account that the balance of risks shifts towards the considerable economy cooling despite a slight increase in inflation risks. According to the Bank of Russia forecast, consumer price growth will continue to slow amid slack domestic demand. Annual inflation will fall below 7% in July 2016 and reach the 4% target in 2017. The Bank of Russia will further decide on its key rate depending on the balance of inflation risks and risks of economy cooling.

Indeed, today’s rate cut, although not unexpected, triggered additional selling pressure on the ruble, which against the dollar has lost over 40% in the past year.  The next policy Board meeting is scheduled for September 11.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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