Russia's central bank held its new policy rate, the "key" rate introduced last month, steady at 5.50 percent, saying it expects inflation to continue to slow down this year and decline further in 2014, but "nevertheless, more pronounced downward trends in inflation expectations need to be formed to ensure the achievement of inflation goals in the medium term."
The guidance by the Bank of Russia, which has held its policy rates steady since September 2012, indicates that it is close to cutting rates to stimulate the economy but wants to be absolutely sure that inflation remains within its 5-6 percent range.
The central bank's decision was largely expected after the bank's governor, Elvira Nabiullina, said last month that the likelihood was strong that borrowing costs would be kept unchanged if current trends were sustained.
Russia's central bank gave a largely downbeat assessment of the economy, saying the pace of economic growth remains low, with subdued production activity and investment demand, and a continued deterioration of producer confidence.
Consumer demand and retail lending growth remain the major economic drivers but while gross output is expected to remain below its potential level, the bank does not expect a major widening of the negative output gap.
"Given subdued investment activity and sluggish recovery of external demand, the Bank of Russia expects the economic growth rate to remain low in the medium term," it said.
Russia's Gross Domestic Product contracted for the second quarter in a row, falling 0.26 percent in the second quarter from the first for annual growth of 1.2 percent, down from 1.6 percent.
Russia's inflation rate, which has been declining since hitting a 2013 high of 7.4 percent in May, fell to 6.1 percent in September. This trend continued in the beginning of October and as of Oct. 7 the inflation rate had eased further to 6.0 percent, the Bank of Russia said.
"The absence of significant demand-side inflationary pressure in the conditions of gross output staying slightly below its potential level is one of the factors behind the decline in core inflation in recent months," the bank said, adding that core inflation was steady at 5.5 percent in September.
Based on an expected improvement in food market conditions due to a favourable harvest, the central bank expects inflation to stay within its target range until the end of this year and if "current macroeconomic tendencies continue, inflation is projected to decline further in 2014."
At its meeting last month, the central bank's board of directors took a major step forward in its move towards an inflation-targeting regime in February next year by adopting its one-week rate on repo and deposit auctions as its key policy rate within an interest rate corridor that has a ceiling of 6.50 percent and a bottom of 4.50 percent on one-day rates for liquidity provision and absorption.
The bank said this new key rate would become the main policy instrument from Feb. 1, 2014 when it stops conducting one-day repo auctions on a daily basis and starts using 1-6 day repo auctions as a way of fine-tuning its liquidity operations.
By emphasizing the new key rate in today's statement and omitting any mention of the previous policy rate, the refinancing rate, the central bank apparently wants to speed up the transition.
In an accompanying table, the bank said the refinancing rate was maintained at 8.25 percent. The plan is to gradually phase this rate to the level of the key rate by 2016.
www.CentralBankNews.info
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