The Bank of Russia cut its benchmark one-week repo rate by 25 bps to 7.5 percent during its June meeting and signaled more rate cuts were likely in the next few months, as inflation continues to slow amid weaker-than-expected economic growth. Policymakers also lowered their end-of-year annual inflation forecast for 2019 to 4.2-4.7 percent from 4.7-5.2 percent previously estimated. Moving on, the central bank sees annual inflation staying close to 4 percent.
Excerpts from the Information Notice of Bank of Russia:
6/14/2019 10:46:12 AM
Annual inflation slowdown is continuing. Annual consumer price growth rate declined in May to 5.1% (from 5.2% in April 2019) and reached an estimated 5.0% as of 10 June. That said, starting in February, seasonally adjusted monthly consumer price growth has remained close to 4% (annualised).
Consumer demand trends constrain inflation. Also, temporary disinflationary factors contributed to slowing consumer price growth, among those ruble appreciation since the beginning of the year and the high base effect in respect of the price dynamics of principal types of motor fuel.
Economic growth in the first half of 2019 is lower than the Bank of Russia’s expectations. In January-April, the annual industrial production growth rate remained close to the readings of 2018 Q4. Export growth rates have declined amid weakening external demand. Investment activity remains muted. Annual retail sales growth rate has been slowing down since February on the back of moderate dynamics of household income. Consumer demand and labour market conditions create no excessive inflationary pressure.
Taking into account GDP growth statistics for 2018 — 2019 Q1 published by Rosstat, the Bank of Russia lowered its GDP growth forecast for 2019 from 1.2-1.7% to 1.0-1.5%. Subsequent years might see higher economic growth rates as national projects are implemented.
Short-term proinflationary risks have abated compared to March. The effects of the VAT hike have fully materialised. The revision of the interest rate paths by the US Fed and other central banks in advanced economies in 2019 H1 reduces the risks of persistent capital outflows from emerging markets.
That said, significant risks are posed by elevated and unanchored inflation expectations, as well as by several external factors. In particular, 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.
If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to neutral monetary policy until mid-2020. 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.