Russia Cuts Key Rate to 11%

The Bank of Russia lowered its benchmark one-week repo rate by 50 bps to 11 percent on July 31st. It is the fifth straight cut aimed at boosting growth and despite a slight increase in the inflation risks.
Central Bank of the Russian Federation | Yekaterina Guchshina | 7/31/2015 12:09:19 PM
Excerpts from Information Notice of Bank of Russia:

On 31 July 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 11.50 to 11.00 per cent per annum, taking into account that the balance of risks shifts towards the considerable economy cooling despite a slight increase in inflation risks. According to the Bank of Russia forecast, consumer price growth will continue to slow amid slack domestic demand. Annual inflation will fall below 7% in July 2016 and reach the 4% target in 2017. The Bank of Russia will further decide on its key rate depending on the balance of inflation risks and risks of economy cooling.

Annual inflation temporarily accelerated in July, which was expected and caused by a greater increase in utility tariffs compared with 2014. As of 27 July 2015, annual consumer price growth rate rose to 15.8% from 15.3% in June, according to Bank of Russia estimates. Weekly inflation declined to 0.0 — 0.1% again after a significant increase early this month. Amid a considerable reduction in real income slack consumer demand hampers consumer price growth.

Major macroeconomic indicators demonstrate further economy cooling. The Bank of Russia estimates GDP decrease in 2015 Q2 compared with the similar quarter last year to be more significant than that in Q1 2015. Though structural factors continue hampering the economic growth, output contraction is having cyclical nature. Low consumer and business confidence as well as decreased capacity and labour force utilisation are indicative of this. However, unemployment remains low amid the negative demographic trends, while the labour market adjusts to the new conditions largely through wage decrease and growing part-time employment. These factors along with the decline in retail lending will result in further contraction of consumer spending. Fixed capital investments will continue to contract due to economic agents’ negative expectations with regard to the Russian economic outlook and tighter lending conditions. Poor substitution of external funding sources with domestic ones caused by shallow Russian financial market and high debt burden will also contain investment demand. Implementation of government anti-recession measures will facilitate investments. Sluggish investor and consumer activity will result in low demand for imports. Export decline will be less considerable given the floating exchange rate. As a result, net exports will be the only component to make a positive contribution to annual output growth. Due to a more significant domestic demand shrank than that expected in the first half of 2015, the output forecast may be revised downwards.

The economic situation in Russia will further depend on the dynamics of world energy prices and the economy’s ability to adapt to external shocks. At the same time the scenario with oil prices remaining below US$60 per barrel for a long time is more probable than it was in June.

Inflation risks arise mostly from aggravated external economic situation, enhanced inflation expectations, revision of increases in administered prices and tariffs, of payments indexation for 2016-2017, and fiscal policy easing in general. The Bank of Russia will further decide on its key rate depending on the balance of inflation risks and risks of economy cooling.

Russia Cuts Key Rate to 11%