Russia keeps key rate at 11% with inflation risks largely unchanged

By Marisa Wong

Morgantown, W.Va., Oct. 30 – The Bank of Russia’s board of directors decided to maintain the key rate at 11% on Friday, according to a notice from the bank.

The bank cited “persistent substantial inflation risks.” The bank also said that the balance between inflation risks and the risks of the economy cooling have, for the most part, remained the same.

The annual pace of consumer price growth in October 2016 is estimated to be under 7% and expected to total 4% in 2017. The bank said that as inflation slows down in line with the forecast, it will continue with a downward revision of its key rate at one of its upcoming board of directors meetings.

The board reported that between September and October, annual inflation was slightly down. According to the bank’s estimates, annual consumer prices grew at 15.6% as of Oct. 26 and at 15.8% in August.

Inflation expectations, though reduced as compared with September, remain elevated. The moderately tight monetary policy and the weak domestic demand driven by the low growth of the nominal income of the population help constrain the growth of consumer prices, the notice said.

The moderately tight monetary conditions are also exerting downward pressure on prices, the bank said. Money supply (M2) growth rates remain low. Influenced by the bank’s previous key rate reductions, lending and deposit rates remain on a downward trend. These still remain on the level that, on the one hand, keeps ruble savings attractive and, on the other hand given sustaining high debt burden and tight creditworthiness requirements, is a factor behind low annual lending expansion.

September saw a somewhat slower economic downturn, shown by key macroeconomic indicators.

Going forward, the economic situation will depend on global energy prices and the pace of economy’s adjustment to external shocks, the bank said.

The bank added that key sources of inflation risks include a further worsening of external climate, persistently high inflation expectations and an upward revision, planned for 2016 to 2017, of rates and prices in the regulated sector, upward revision of social payments indexation, as well as overall budget policy easing.

The next meeting of the Bank of Russia’s board of directors to review its key rate is scheduled for Dec. 11.

As previously reported, the bank reduced the key interest rate by 50 basis points to 11% from 11˝% in July.

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