On 23 March 2018, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 7.25% per annum. Annual inflation remains sustainably low. Inflation expectations are diminishing progressively. The Bank of Russia forecasts annual inflation to be 3-4% in late 2018 and remain close to 4% in 2019. In this environment the Bank of Russia will continue to reduce the key rate and will complete the transition to neutral monetary policy in 2018.
In making its key rate decision, the Bank of Russia recognised the following factors.
Inflation dynamics. Annual inflation remains sustainably low. In February 2018 it stood at 2.2%. Inflation remains below 4% longer than expected, allowing for a quicker transition to neutral monetary policy this year.
Factors, previously seen as mostly temporary, are becoming more persistent under the influence of the following structural changes. First, investments in agriculture and an increase in its production capacity reduce harvest’s dependence on weather conditions and have a restraining influence on food price growth. Second, the implementation of the budget rule lowers the sensitivity of domestic economic conditions, including exchange rate and inflation dynamics, to changes in oil prices. These developments make the stabilisation of inflation at low levels more sustainable and reduce the risks of significant fluctuations.
Current consumer price dynamics favour a decrease in inflation expectations of households and businesses, further contributing to keeping inflation at bay. However, households’ inflation expectations are still way above the inflation target, still sensitive to the possible increase in prices for certain goods, including food products.
The slowdown of annual inflation may continue in the first half of 2018. This partially results from last year’s high base effect of food inflation. Inflation will begin to gradually return to the target in the second half of the year, supported by further recovery of domestic demand. The Bank of Russia forecasts annual inflation to be 3-4% in 2018 and close to 4% in 2019.
Monetary conditions. Monetary conditions continue to ease. Their disinflationary effect is gradually declining.
The interest rate dynamics were a key contributor to easing of monetary conditions. Real interest rates remain positive promoting savings. Non-price lending conditions for legal entities remain mostly constraining with banks still showing conservative approach to screening borrowers and increasing lending. The increase in mortgage and consumer lending does not pose any risks for inflation to rise above 4% so far.
The key rate decision and the potential for its decrease in the future will contribute to further easing of monetary conditions, thus supporting domestic demand and creating prerequisites for inflation to approach 4%.
Economic activity. Economic growth resumed in early 2018, following the decline due to temporary headwinds in late 2017.
In January — February, the annual industrial production growth returned to the positive territory. The period also saw a continued growth in investment. The recovery in consumer demand is supported by rising real wages and expanding retail lending.
The Bank of Russia’s general perceptions of the Russian economy’s growth have remained unchanged. The Bank of Russia has slightly raised the oil price in its baseline scenario. However, it has not entailed any significant review of the Russian economy’s growth rate in the medium term due to its decreased sensitivity to oil price changes and remaining structural constraints. In 2018-2020, GDP will grow by 1.5-2%, which corresponds to the potential growth rate of the economy.
Inflation risks. The Bank of Russia’s assessment of inflation risks has not changed significantly, save for the risks posed by the labour market. The dynamics of wages and unemployment create prerequisites for potentially higher inflationary pressure. At the moment, the assessment of the duration and scale of effect of these drivers remains unclear. The Bank of Russia will pay particular attention to the situation in the labour market, including the impact of the dynamics of incomes and wages on consumer behaviour and inflation.
The Bank of Russia will also monitor risks posed by external factors, considering the episodes of increased volatility in the global markets on the back of monetary policy normalisation in other countries and growing uncertainty with respect to the trade policy.
The Bank of Russia Board of Directors will hold its next rate review meeting on 27 April 2018. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.