Thursday, April 30, 2015

Russia cuts rate 150 bps and is ready to cut further

    Russia's central bank cut its key rate by 150 basis points to 12.50 percent and said it was ready to cut rates further as inflationary risks continue to weaken.
    The Bank of Russia has now cut its rate by 450 basis points this year as it slowly reverses last year's total rate rises of 1,150 basis points to protect the value of the ruble and prevent an inflationary surge in response to the conflict with Ukraine that triggered Western sanctions on top of last year's plunge in oil prices that hit Russia's exports hard.
    But the outlook for Russia's economy has brightened as oil prices have rebounded, tensions in Ukraine have calmed and the ruble has rallied in the last three months.
    The Bank of Russia said inflation is now starting to stabilize and inflationary expectations have declined against the background of falling consumer demand from lower incomes.
    The central bank said it now expects the inflation rate to decline to below 8 percent by April 2016 and hit its target of 4 percent in 2017. Last month the central bank forecast that inflation would slow to 9 percent by March 2016.
    Russia's headline inflation rate eased to 16.5 percent as of April 27 from 16.9 percent in March, but the bank said this was largely due to short-term factors of the weak ruble in late 2014 and January 2015 and trade restrictions.

   The Bank of Russia issued the following statement:

The Board of Directors of Bank of Russia April 30, 2015 decided to reduce the key rate c 14,00% to 12,50% per annum, taking into account the weakening of inflationary risks, while maintaining a significant risk of cooling the economy. In the face of February - April 2015 the ruble and a significant reduction in consumer demand monthly consumer price inflation declining, there are signs of stabilization in annual inflation. According to the forecast of the Bank of Russia, slower growth in consumer prices will occur faster than previously expected. Annual inflation will fall to less than 8% a year (April 2016 to April 2015) and to the target level of 4% in 2017. As a further weakening of inflationary risks, the Bank of Russia will be ready to continue the reduction in the key rate.

According to the Bank of Russia as of April 27, the annual growth rate of consumer prices was 16.5%. The existing high level of annual inflation mainly due to the effect of short-term factors: the weakening of the ruble in late 2014 - January 2015 and trade restrictions. However, in March-April, the monthly growth rate of consumer prices fell an estimated average to 1.0% after 3.1% in January and February, there were signs of stabilization in the annual inflation rate. The moderating effect on prices exerted decline in consumer demand in the face of shrinking real income observed in the last months of the ruble. Against this background, there was a decrease in inflationary expectations of the population.
Slower growth in consumer prices also contribute to folding monetary conditions. The growth rate of money supply (M2) stored at a low level. Influenced by earlier decisions taken by the Bank of Russia cut the key rate there is some downward correction lending and deposit rates. However, their level remains high, on the one hand, helps to preserve the attractiveness of savings in rubles, on the other - along with the tightening of the requirements for ensuring the quality of borrowers and leads to slower credit growth on an annualized basis.

Dynamics of the main macroeconomic indicators show a significant decline in GDP in the I quarter of 2015. While structural factors continue to have a dampening effect on economic growth, decline in output is now largely cyclical. This is evidenced in the number of observed decline in capacity utilization and labor, as well as a slight increase in the unemployment rate. According to the Bank of Russia, the labor market adjustment to the new conditions is mainly due to lower wages and underemployment. These factors, along with a decrease in the annual growth rate of retail lending will lead to a further decrease in consumer activity. Reduced investment in fixed assets will continue to be due to retention of high economic uncertainty, deteriorating financial performance of the companies, the tightening of credit conditions, limited possibilities of substitution of external financing domestic, given the narrowness of the Russian financial market, as well as the high prices of imported investment goods. Weak domestic demand will have a restraining effect on imports. Net exports will be the only component that make a positive contribution to output growth rates. As a result of these factors occur decline in output in 2015. In the future, in terms of import substitution, gradual diversification of funding sources and mitigate the domestic credit conditions, as well as some increase in oil prices is expected to recover quarterly GDP growth.

Thus, the current economic conditions will help to reduce inflation. An additional deterrent effect on consumer prices will continue to provide an event ruble. Expected decline in inflation in the month, and on an annualized basis. Slower growth in consumer prices will create the preconditions to reduce inflation expectations. According to the forecast of the Bank of Russia, the annual inflation will slow to less than 8% a year until the target level of 4% in 2017.

The main sources of inflationary risks is to maintain inflation expectations at a higher level, the deterioration of the external economic environment, the revision of the planned rate of growth of regulated prices and tariffs, easing of fiscal policy, as well as accelerated growth in nominal wages, including in the public sector. As a further weakening of inflationary risks, the Bank of Russia will be ready to continue the reduction in the key rate.

The next meeting of the Board of Directors of the Bank of Russia, which will consider the question of the level of the key rate, scheduled for  June 15, 2015 . Time of publication of the press release on the decision of the Board of Directors of the Bank of Russia - at 13:30 Moscow time."


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