At its previous meeting in March, the board of the Bank of Russia had maintained a hawkish bias by saying it could keep its tight policy stance for longer than planned as there were still risks that inflation would exceed the bank's target in late 2017.
The central bank last cut its rate in July 2015 despite frequent calls for cuts to boost growth.
Russia's inflation in March continued to decelerate, falling to 7.3 percent from 8.1 percent in February for the lowest rate since April 2014 and the central bank estimated that inflation had eased further to 7.3 percent as of April 25.
The deceleration in inflation is in line with the bank's forecast of inflation dropping below 8 percent in April although inflation is likely to accelerate temporarily mid-year due to base effects.
"However, further on inflation will continue to go down," the bank said, predicting that inflation will reach about 5.0 percent in April 2017 and its 4.0 percent target in late 2017.
Earlier this month Russia's economy ministry forecast that inflation would remain above 4 percent in 2017 and 2018 though the finance minister has said talks were underway to unify inflation goals.
Despite the positive signs of falling inflation, the central bank pointed to the risk that expectations are only declining slowly, uncertainties surrounding the national budget and wages.
The central bank was also optimistic about the recovery of Russia's economy, saying it was showing a higher resistance to fluctuations in oil prices as the process of import substitution was making a positive contribution to industrial production and capacity utilization was improving.
"The on-going shifts in the economy anticipate the beginning of its recovery growth," the central bank said, adding quarterly growth rates are expected to reach positive levels in the second half of this year and early 2017.
In 2015 Russia's economy contracted by 3.7 percent and is forecast to contract around 1 percent this year.
The Russian ruble has been appreciating since mid-January and is now up by 14.3 percent this year, trading at 64.2 to the U.S. dollar today, and is now only 7 percent below the start of 2015.
The Bank of Russia released the following statement:
On 29 April 2016, the Bank of Russia Board of Directors decided to keep its key rate at 11.00% p.a. The Board of Directors sees the positive processes of inflation slowdown and inflation expectations decline, as well as shifts in the economy which anticipate the beginning of its recovery growth. At the same time, inflation risks remain elevated. These risks primarily stem from slowly declining inflation expectations against the target, uncertainty in parameters of the national budget, and ambiguity of the observed movements in nominal wages. Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings. The Bank of Russia predicts, consistent with the decision, the annual inflation to stand at about 5% in April 2017, to reach the 4% target in late 2017.
In making its key rate decision, the Bank of Russia Board of Directors has proceeded from the following factors.
First. Inflation fell perceptibly; however, the trend bears risks of instability. Slower consumer price growth is triggered by weak demand and gradually descending inflation expectations, driven by, inter alia, the moderately tight monetary policy. Meanwhile, the factors, which are likely to have a temporary impact, have also made a considerable contribution to inflation reduction. They include the Government’s decisions on indexation of wages, pensions, administrated prices and tariffs, as well as a drop in global food prices.
Under the Bank of Russia estimates, the annual consumer price growth rate is down to 7.3% as of 25 April 2016 / as of 25 April 2016 remained at the level of March 2016 of 7.3%. This is in line with the inflation forecast for the year ahead, which the Bank of Russia published in its April 2015 press release (below 8%). In mid-2016, the annual consumer price growth is likely to accelerate temporarily owing to the low-base effect of the previous year. However, further on inflation will continue to go down. The Bank of Russia predicts, consistent with the decision, the annual inflation to stand at about 5% in April 2017, to reach the 4% target in late 2017.
Second. Key macroeconomic indicators show higher resistance of the Russian economy to fluctuations in oil prices. The floating exchange rate partially sets off the negative impact of external shocks. The development of import substitution and expansion of non-commodity exports make a positive contribution to industrial production dynamics. Capacity utilisation indicators have improved. The on-going shifts in the economy anticipate the beginning of its recovery growth. Quarterly GDP growth is expected to reach positive territory in 2016 H2 — early 2017.
Third. Interest rates in the economy are set to decline further even with the key rate unchanged. This is mainly driven by the planned Reserve Fund spending to finance the budget deficit and the ensuing changeover in the banking sector to a liquidity surplus.
Fourth. There remain elevated inflation risks. These primarily stem from slowly declining inflation expectations against the inflation target, mixed data on movements being observed in nominal wages, uncertainty in parameters of further wages and pensions indexation, and from the absence of
mid-term budget consolidation strategy. Due to the continued supply glut in the oil market, the risks of crude prices dropping and their negative pressure on exchange rate and inflation expectations remain high enough.
Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings.
The Bank of Russia Board of Directors will hold its next rate review meeting on 10 June 2016. The press release on the Bank of Russia Board decision is to be published at 13:30, Moscow time."