Russia Cuts Key Rate to 7.25%, Signals Future Cuts

The Central Bank of Russia cut its benchmark one-week repo rate by 25bps to 7.25 percent on July 26th and said more cuts were likely later this year amid slowing inflation and global growth concerns. It follows a 25bps cut in the previous meeting, bringing borrowing costs to their lowest since August of 2018 as widely expected.

Excerpts from the Information Notice of Bank of Russia:

Inflation dynamics. Inflation slowdown is continuing. Annual consumer price growth rate declined to 4.7% in June (from 5.1% in May 2019) and was close to 4.6% according to the estimates as of 22 July. June results show that annual core inflation declined for the first time since March 2018 and reached 4.6%. Seasonally adjusted monthly consumer price growth rate slowed down to 0.1% in June vs 0.3-0.4% in February-May. According to Bank of Russia estimates, most monthly inflation indicators reflecting the most sustainable price movements are close to 4% (annualised).

Consumer demand trends constrain inflation. Temporary disinflationary factors also contributed to slowing consumer price growth, including ruble appreciation since the beginning of the year and the decline in fruit and vegetable prices on the back of early new harvest arrival. Annual inflation dynamics were also influenced by base effects.

In June and July, business price expectations continued to decline. Households’ inflation expectations have not materially changed since April and remain elevated. Inflation slowdown paves the way for a future decline in inflation expectations.

According to the Bank of Russia’s forecast, taking into account the pursued monetary policy, annual inflation will return to 4% in early 2020.

Economic activity. Russian economy’s growth rate since the beginning of the year has been lower than the Bank of Russia’s expectations. This was caused by weak investment activity dynamics and a significant drop in annual export growth rates, including on the back of weaker external demand. The second quarter saw an increase in annual industrial production growth, which may not be steady. Retail trade turnover growth continued to decline YoY amid falling real disposable household incomes. Unemployment remains at the historic lows. However, given the contracting number of employees and the labour force, it does not create any additional inflationary pressure.

In the first half of the year, fiscal policy had additional constraining effect on the economic activity, which is in part related to the shift of implementation schedule of a number of national projects planned by the Government. Since the second half of 2019, government spending, including investment expenditures, is expected to rise.

Inflation risks. Disinflationary risks exceed pro-inflationary risks over the short-term horizon. This is primarily related to the weak dynamics of domestic and external demand.

That said, significant risks are posed by elevated and unanchored inflation expectations. The risk of a slowdown in global economic growth still looms caused, among other things, by the further tightening of international trade restrictions. Geopolitical factors might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations. Supply-side factors in the oil market may amplify volatility of global oil prices. However, the revision of interest rate paths in the US and the euro area in June and July reduces the risks of considerable capital outflows from emerging markets.

The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements, prices of individual food products, and possible changes in consumer behaviour. These risks remain moderate.

Russia Cuts Key Rate to 7.25%, Signals Future Cuts

Central Bank of the Russian Federation | Agna Gabriel |
7/26/2019 11:02:45 AM