Russia Holds Key Interest Rate at 7.25%

The Bank of Russia held its benchmark one-week repo rate at 7.25 percent on July 27th despite low inflation, saying uncertainty persists over how strongly the planned increase of the value added tax may affect inflation expectations and how the external conditions will develop. Policymakers expect annual inflation to be 3.5-4 percent in late 2018 and to temporarily overshoot 4 percent in 2019, before returning to 4 percent in early 2020.
Central Bank of the Russian Federation | Joana Ferreira | 7/27/2018 10:41:46 AM
Excerpts from the Information Notice of Bank of Russia:

Annual inflation remains low. It stood at 2.3% in June and is expected to hold within the 2.5–2.6% range in July in line with the Bank of Russia’s forecast. According to Bank of Russia estimates, a majority of annual inflation indicators reflecting the most sustainable price movements suggests that inflation is gradually returning to the target.

Inflation for main consumer basket product groups continued to show mixed dynamics in June. The annual price growth rate in the food market was near zero. Fruit and vegetable prices went down on the back of the last year’s high base effect, among other reasons. That said, annual inflation in other food product categories rose from 0.8% in May to 1.1% in June. The annual price growth rate in the non-food market jumped to 3.7% (vs 3.4% seen in May), driven mainly by rising petrochemical prices. Petrol price movements affected inflation expectations which continued to rise in June. Real-time July data show that petrol prices ceased to increase as a result of the decision to cut petrochemical excise taxes. In these circumstances, household inflation expectations stabilised in July. The annual services price growth rate held close to 4% in June.

Given the effect of the planned fiscal measures on inflation and inflation expectations, monetary conditions should remain to some extent tight to limit the scale of secondary effects and stabilise annual inflation close to 4% over the forecast horizon.

The updated Rosstat statistics reflect steadier economic growth in 2017 — early 2018 than previous estimates. It does not materially change the Bank of Russia’s view regarding the influence of business activity on inflation, considering that the reviewed data mostly concern investment goods production. The FIFA World Cup made a positive contribution to the annual GDP growth rate in Q2 (0.1–0.2 pps).

The Bank of Russia forecasts that in 2018 the Russian economy will post a 1.5–2% growth rate, which corresponds to its potential amid the remaining structural limitations.

The balance of risks is shifted towards proinflationary risks. Main risks are related to a high uncertainty over the scale of secondary effects of the adopted tax decisions (primarily, the response of inflation expectations) and the external factors.

With regard to external conditions, accelerated yield growth in advanced economies and geopolitical factors may cause surges in volatility in financial markets and affect expectations for the exchange rate and inflation.

Russia Holds Key Interest Rate at 7.25%