Bank of Russia

December 11, 2015

Russia’s one-week auction rate increased from 5.5% prior to March 2014 to 17% by the end of last year.  900 basis points of that tightening occurred in November and December alone, as Ukraine-related sanctions on Russian trade and plunging oil prices conspired to send the ruble into a tailspin.  With GDP imploding, the ultra-tight monetary stance was not maintained long.  Five rate cuts this year between January and July reduced such to 11.0%, where such still stands after the final scheduled policy review of the year.

Central bank officials are looking for an opportunity to cut the auction rate further but have been stymied lately by upwardly drifting expected inflation, ruble weakness, and a self-imposed embargo on imports of Turkish foods.  In November, CPI inflation slowed to 15.0% from 15.8% in the prior month, but the pace remains too far above the medium-term target of 4% to permit resumed interest rate reductions yet especially in light of elevated uncertainty caused by the impending federal funds rate hike.

Sluggish consumer demand in 2016-2017 and the pursued monetary policy will further contribute to lower consumer price growth. Conservative fiscal policy and low rates of infrastructure companies’ administered prices and tariffs indexation will curb price growth as well. Inflation expectations are anticipated to weaken as inflation slows. According to the Bank of Russia’s forecast, annual consumer price growth will decline to 5.5-6.5% in late 2016 and to the 4% target in 2017. The Bank of Russia will cut its key rate as inflation slows down in line with the forecast.

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



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