Bank of Russia Retains a Moderately Tight Stance

February 3, 2017

The Bank of Russia’s key policy interest rate was slashed by six percentage points during the first seven months of 2015 and by 50 basis points each last June and September, but it has stayed at 10.0% for the past 4-1/2 months and will probably remain at that level at least through mid-2017. This week’s policy review found inflation moving in line with expectations and growth recovering a bit faster than assumed. The baseline forecast envisages inflation, which now stands at 5.1%, slowing to the 4% target by late 2017 and positive but fairly low economic growth this year.

But in a released statement, officials tweak forward guidance in the direction of less accommodation. They had previously hinted that the first half of 2017 could see the interest rate cut further but have now moved away from that position:

The inertia of inflation expectations and households’ shrinking propensity to save may prevent inflation from consolidating on the path towards the target as the effect of temporary factors comes to an end. External political and economic uncertainty remains elevated, which may negatively affect expectations as regards exchange rate and inflation. Maintenance of moderately tight monetary conditions will constrain inflation risks, including the short-term ones, coming from the launch of the Finance Ministry-conducted purchase of foreign currency in the foreign exchange market. Considering the change in the external and internal environment, the Bank of Russia’s capability to downgrade its key rate in the course of the first half of 2017 has diminished.

In a separate release today, the Russian composite purchasing managers index rose strongly to signal the fastest rate of expansion since mid-2008. A prudent anti-inflationary central bank stance doesn’t seem to be jeopardizing the recovery, and having a friendly asset in the White House will not hurt, either.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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