Friday, January 29, 2016

Russia maintains rate but may raise if inflation risks rise

    Russia's central bank maintained its key policy rate at 11.0 percent, citing the higher risk of higher inflation from the slump in crude oil prices and cautioned that if "inflation risks amplify, the Bank of Russia cannot rule out a tightening of its monetary policy."
    The Bank of Russia, which cut its rate by 600 basis points in 2015 as it began rolling back 2014's total hikes of 1,150 points, said the "stubborn glut of oil, the slowing Chinese economy, combined with the US Federal Reserve rate hike, have triggered a further drop in the price of crude."
   Last week's plunge in oil prices to below $28 a barrel pushed down Russia's ruble to a new record low of 86 to the U.S.dollar before the bounce back in oil prices helped it recover to around 76 today, down 4 percent since the start of this year and 21 percent lower than the beginning of 2015.
    The ruble has been under pressure since the drop in oil prices began in mid-2014 but the conflict in Ukraine and the imposition of Western sanctions added further pressure.
    "The recent weakening of the ruble is putting pro-inflationary pressure and causes inflation expectations to grow, despite a slowdown in annual inflation," the central bank said.
    The impact of the fall in oil prices has forced the central bank to change its policy guidance. In December the Bank of Russia said it would continue to lower its key rate "at one of its forthcoming Board of Directors' meetings" in response to slowing inflation.
    After almost hitting 17 percent in March 2015, Russia's inflation rate has been easing but the central bank warned that if oil prices remain low, it will lead to higher inflation and increase the risk of financial instability, requiring more extensive changes in the economy.
    Inflation eased to a 2015-low of 12.9 percent in December and the central bank expects it to fall further to around 10 percent in January and then by 8-9 percent in the first quarter.
   By January 2017 the central bank still expects inflation to fall below 7 percent and then continue to decelerate to the target of 4 percent by late 2017.
    "However, the risks have grown that inflation may deviate from the target in late 2017," it said, acknowledging that oil prices are likely to be lower in 2016 and 2017 than it expected.
    Low oil prices will affect Russia's exports, balance of payments and "result in a more sizable GDP contraction in 2016 than previously forecast," the central bank said, adding growth should be positive in 2017, though it will be low.
    The central bank had previously forecast that Gross Domestic Product would contract by 0.5 to 1.0 percent in 2016 and then expand by 0-1.0 percent in 2017.
    The International Monetary Fund forecasts that the economy will shrink 1 percent this year after an estimated contraction of 3.7 percent in 2015 and growth of 0.6 percent in 2014.

    The Bank of Russia issued the following statement:

"On 29 January 2016, the Bank of Russia Board of Directors decided to keep its key rate at 11.00% p.a. On the backdrop of yet another oil price slump, monthly consumer price growth rates stabilised at a high level, with a higher risk of accelerated inflation. The deterioration in the global commodity markets will require a further adjustment of the Russian economy. On the strength of today’s decision, the Bank of Russia estimates annual inflation to decrease to a point below 7% as early as January 2017 so it reaches the 4% target by late 2017. Should inflation risks amplify, the Bank of Russia cannot rule out a tightening of its monetary policy.
The time period since the Bank of Russia Board meeting in December saw risks to price stability escalating. The stubborn glut of oil, the slowing Chinese economy, combined with the US Federal Reserve rate hike, have triggered a further drop in the price of crude. This, in its turn, caused the national currencies to weaken and asset prices to drop in emerging markets, affecting Russia. With more volatility in oil prices, the magnitude of variation in Russian financial asset prices and the ruble exchange rate fluctuation has increased. 
The recent weakening of the ruble is putting pro-inflationary pressure and causes inflation expectations to grow, despite a slowdown in annual inflation. According to Bank of Russia estimates, the annual growth rate of consumer prices is set to drop from 12.9% for December 2015 to approximately 10% for January 2016. This slowdown in annual inflation is in line with the previous forecasts. The Bank of Russia expects consumer prices in 1Q 2016 to grow 8-9% against the same period last year. There are risks that inflation in 2Q 2016 may accelerate, caused by, among other factors, the low base effect. Thereafter, annual consumer price growth rate is set to resume its decline. This should occur on the back of, inter alia, reduced inflation expectations and the Bank of Russia’s monetary policy. According to the Bank of Russia estimate, on the strength of today’s decision, inflation is set to decrease to a point below 7% as early as January 2017 so it reaches the 4% target by late 2017. However, the risks have grown that inflation may deviate from the target in late 2017. 
The key rate decision has been made in recognition of the current economic situation, with elevated risks of continued recession provoked by falling oil prices. The high debt load of Russian companies and interest rate risks for banks and their borrowers have also been factored in. 
In 2016-2017, oil prices are likely to be lower than forecast previously in the baseline scenario. The floating exchange rate will partially offset the negative impact of energy prices on the economy. However, the balance of payments and the economy will have to be further adjusted to lower global prices for the key Russian exports. This will result in a more sizable GDP contraction in 2016 than forecast previously in the baseline scenario. The additional adjustment may take several quarters. The GDP growth rate will enter positive territory in 2017, but will be low. 
However, should oil prices remain persistently low, this will further escalate inflation and financial stability risks and will require a more extensive adjustment of the economy to the new conditions. A continued persistence of high inflation expectations may also hamper the slowdown of consumer price growth. A well-balanced fiscal policy will be required to mitigate these risks in the medium term. 
Should inflation risks amplify, the Bank of Russia cannot rule out a tightening of its monetary policy. 
The Bank of Russia Board of Directors will hold its next rate review meeting on 18 March 2016. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time."


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