Bank of Russia Retains a 7.5% Base Interest Rate

June 16, 2014

The policy bias, however, remains skewed toward further restraint.  The base rate had been increased by 150 basis points in early March and another 50 basis points in last April, and a statement explaining today’s decision warns

In case existing inflation risks materialize, and threats to medium-term inflation targets emerge, the Bank of Russia will continue increasing the key rate.Significant inflation acceleration in February‑May 2014 was prompted by a number of unforeseen factors, i.e. the considerable impact of exchange rate dynamics on consumer prices, as well as unfavourable conditions in the markets for some goods. Taking into account that monetary policy influence on the economy is distributed over time, inflation slowing to the 5.0% target in 2014 is unlikely.

The latest CPI data put total inflation at 7.6% and the core rate at 7.0%, which is not even close to target.  Elevated inflation has been accompanied by a sharp slowdown of economic growth, which will at best be barely positive this year.  Russia’s composite purchasing managers index posted a third straight sub-50 reading in May.  The 47.1 score was moreover at a five-year low.  The poor economic circumstances were caused by President Putin’s adventurous designs on controlling Ukraine, which has isolated Russia from the G7 and world community of nations.  Ironically, the unsettled situation in Iraq could prove a neutralizing factor by elevating the price of Russian energy exports.

The next Bank of Russia policy meeting is scheduled for July 25.

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



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