Bank of Russia

October 27, 2017

The fifth cut so far in 2017 in Russia’s central bank interest rate, this time to 8.25% from 8.50%, was announced today. The previous four reductions totaled 150 basis points, and previous cuts amounted to six percentage points during the first seven months of 2015 and 100 basis points last year. All in all, the rate has declined 875 basis points since the end of 2017. And yet compared to inflation now running at a tad below 3.0% versus a 4% target, policy remains moderately tight.

According to a statement released by the central bank’s press service, the decline of inflation recently reflects some temporary factors, and inflation is likely to move close to target next year. In fact, three factors are cited in asserting that inflation risk still lies to the upside:

Medium-term risks of inflation overshooting the target dominate over the risks of its persistent downward deviation. The main risk sources of inflation overshooting the target in the medium term remain unchanged. First, increasing structural labor shortage may cause labor productivity growth to considerably lag behind wage growth. Second, inflationary pressure may stem from households’ shrinking propensity to save. Third, inflation expectations remain elevated and subject to fluctuations caused by movements in prices of certain goods and services and the exchange rate.

Although “the Bank of Russia Board of Directors leaves open the option of further rate reduction at its upcoming meetings,” the central message of today’s statement is that the transition from the current moderately tight policy stance to a neutral stance needs to proceed gradually.

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



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