Russia Raises Key Rate to 8%

Russian central bank hiked its benchmark one-week repo rate by 50 bps to 8 percent on July 25th, aiming to curb high inflation caused by geopolitical tensions. Policymakers also said that the interest rates could rise further if high inflation risks persist.

Excerpts from Information Notice of Bank of Russia:

Inflation deceleration in July 2014 has been slower than expected. At the same time, inflation risks have increased due to a combination of factors, including inter alia, the aggravation of geopolitical tension and its potential impact on the ruble exchange rate dynamics, as well as potential changes in tax and tariff policy. The build-up of these risks will lead to inflation expectations remaining heightened and creates threats of inflation exceeding the target in the coming years. The adopted decision is aimed at slowing the consumer price growth to the 4.0% target level in the medium term. If high inflation risks persist, the Bank of Russia will continue raising the key rate.

Over Q2 2014 the moderate recovery of economic activity has been observed. According to the Bank of Russia estimates, the GDP growth rate was close to zero in Q2 following negative figures earlier. Low economic growth rates are largely caused by structural factors. Utilization of production factors — labor force and commercially viable production capacities — is high. Labor productivity growth is sluggish. Due to the demographic trends labor force shortage will continue to affect economic growth in the long term. Along with structural factors, external political uncertainty has a negative impact on economic activity. Investment demand remains weak amid low business confidence, limited access to long-term financing in both international and domestic markets, and declining profits in the real sector. Besides, consumer activity is cooling. Economic slack in most countries that are Russia’s trading partners does not contribute to acceleration in economic growth. At the same time, persistently high oil prices support domestic economy.

Under the scenario of no negative shocks, annual inflation will decline in the second half of 2014. The factors of inflation decline are exhausted impact of ruble depreciation seen in January-March 2014 on consumer prices, lower scale of increase in administered prices and tariffs, expected good harvest, as well as subdued aggregate demand with aggregate output of goods and services remaining below potential. At the same time, there is an increased probability of negative trends which may result in inflation acceleration. These shocks include aggravation of geopolitical tension, adjustments in monetary policy of foreign central banks and the potential impact of those factors on national currency exchange rate dynamics, tax and tariff policy changes under discussion. Against this background the adopted decision will set conditions for a decline in annual consumer price growth rates to 6.0-6.5% by the end of 2014 and to the target level of 4.0% in the medium term. If high inflation risks persist, the Bank of Russia will continue raising the key rate.

Russia Raises Key Rate to 8%

Central Bank of the Russian Federation | Joana Taborda |
7/25/2014 11:06:26 AM