Russia Cuts Key Rate to 6.5%, More than Expected

The Central Bank of Russia slashed its benchmark one-week repo rate by 50bps to 6.50 percent on October 25th, surprising markets who expected a 25bps reduction. It is the fourth rate cut this year, as inflation slowdown is overshooting the forecast and inflation expectations continue to decrease. The central bank lowered its annual inflation outlook for 2019 to 3.2–3.7% from 4.0–4.5%.
Central Bank of the Russian Federation | Agna Gabriel | 10/25/2019 11:12:32 AM
Excerpts from the Information Notice of Bank of Russia:

Inflation dynamics. Inflation slowdown is overshooting the forecast. Annual consumer price growth rate declined to 4.0% in September (from 4.3% in August 2019) and was close to 3.8% according to the estimate as of 21 October. September results show that annual core inflation also decreased to 4.0% as compared to 4.3% in August. According to the Bank of Russia’s estimates, inflation indicators reflecting the most sustainable price movements are close to or below 4%.

The Bank of Russia has lowered its annual inflation forecast for 2019 from 4.0–4.5% to 3.2–3.7%. Meanwhile, annual inflation will be slightly below 3% in 2020 Q1 when the effect of the VAT rate hike is factored out from the calculation of annual inflation. Given the monetary policy stance, annual inflation will come in at 3.5–4% in 2020 and will remain close to 4% further on.

Economic activity. The Russian economy’s growth rate still remains subdued. In these circumstances, the Bank of Russia keeps unchanged its 2019 GDP growth forecast in the range of 0.8–1.3%. However, current data suggests that the growth of the Russian economy might accelerate in 2019 Q3, partially driven by temporary factors.

The Bank of Russia has left the 2019–2022 GDP growth forecast unchanged. The GDP growth rate will gradually increase from 0.8–1.3% in 2019 to 2–3% in 2022. This will be possible should the Government’s measures for overcoming structural constraints, including the implementation of national projects, be realised. However, the global economic slowdown expected over the forecast horizon will continue to exert a constraining impact on growth of the Russian economy.

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. Disinflationary risks associated with movements in prices of certain food products persist, including on the back of a rise in supply of farm produce. Pro-inflationary risks posed by budget expenditures growth in the second half of 2019 — early 2020 hold low because the rise in expenditures is likely to be more distributed over time. At the same time, should global economic slowdown be more pronounced, including due to tightening international trade restrictions and on the back of other geopolitical factors, this might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations.

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

If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at one of the upcoming Board of Directors’ meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.

Russia Cuts Key Rate to 6.5%, More than Expected