Friday, July 28, 2017

Russia maintains rate but still sees room for cuts in H2

    Russia's central bank kept its key interest rate unchanged at 9.0 percent, as expected by many economists, but reiterated that it still sees room for cutting the rate in the second half of the year with the decision based on the risks to inflation.
    But in contrast to its monetary policy statement from last month, the Bank of Russia expressed concern about the recent rise in inflation, saying the risks to inflation persist and the past decline in inflation expectations had come to a halt in response to higher fruit and vegetable prices.
   "For inflation to become anchored close to the 4% target, a sustainable decline in inflation expectations is required," the central bank said.
     Russia's central bank most recently cut its rate in June and at that point said inflation was now close to its 4.0 percent target and inflation expectations had kept declining.
    But inflation picked up speed to 4.4 percent in June from 4.1 percent in May and the central bank again said it would conduct a "moderately tight monetary policy" for a long time to anchor inflation close to its target.
     The Bank of Russia has cut its rate three times this year by a total of 100 basis points following cuts of 100 points in 2016 and 600 points in 2015 as it  it gradually lowers the rate from 17 percent that was hit in December 2014.
     While inflation rose more than expected in June, the central bank said the trend toward lower inflation was still in place and there were no risks to inflation from recovering consumer demand. The cost of fruit and vegetable should come down in coming months as the harvest comes in. 
      Although Russia's ruble weakened in June and July, the central bank said this had no "meaningful" implications for inflation and inflation expectations given its "substantial strengthening"  earlier in the year.
      In addition to the risk to inflation from fruit and vegetable prices, the central bank pointed to volatility in commodity and financial markets, including the exchange rate "amid elevated geopolitical risks" that may have negative implications for the exchange rate and thus inflation.
      The U.S. Senate on Thursday approved new sanctions against Russia for meddling in the U.S. presidential election, forcing President Donald Trump to decide whether to toughen his stance against Russia or veto the bill in a move that would be seen as politically damaging.
      After rising steadily since January 2016, the ruble has been weakening since early June but was still up 3 percent this year and trading at 59.5 to the U.S. dollar today. 
      After recession in 2015 and 2016 due to Western sanctions over Ukraine and the fall in crude oil prices, Russia's economy has been rebounding this year, with the central bank forecasting growth of 1.3 to 1.8 percent.
      Industrial production is gaining momentum, the central bank said, adding that freight turnover was growing, construction had now recovered and household consumption was up along with higher investment and production.
      But growth is also nearing the country's potential, the central bank cautioned, saying shortages of labor was already visible in some sectors and further economic growth over 1.5 to 2.0 percent a year is only attainable if structural reforms are carried out.

     The Bank of Russia issued the following statement:

"On 28 July 2017, the Bank of Russia Board of Directors decided to keep the key rate at 9.00% per annum. The Board notes that inflation remains close to the target level, while economic recovery is continuing. At the same time, short-term and mid-term inflation risks persist. The decline of inflation expectations has come to a halt, consistent with predictions, in response to price movements in a number of products and services. In order to maintain inflation close to the 4% target, the Bank of Russia will continue to conduct moderately tight monetary policy.
The Bank of Russia sees room for cutting the key rate in the second half of 2017. While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.
In making its key rate decision, the Bank of Russia was guided by the following assumptions. 
Inflation dynamics. Inflation remains close to the target. June saw a slight short-term rise in inflation to 4.4%, which came as a result of price movements in fruit and vegetables under the influence of bad weather conditions. At the same time, the trend towards sustainably low inflation remains in place. Growth rates of food product prices, but for fruit and vegetables, continued to slow, so did prices in the non-food product market and core inflation. Price growth rates continue to show consistency both across regions and in the consumer basket. This is reflected in the growing proportion of products and services posting price growth rates around 4%. In this environment, recovering consumer demand alongside the decline of its disinflationary effect brings no material risks. In the months ahead, as new harvest comes in, prices for fruit and vegetables are set to show a seasonal downward trend. 
Consistent with expectations, the seasonal rise in prices on individual food products brought about a temporary halt in the decline of household and corporate inflation expectations. Their performance could also have been impacted by the traditional rise in regulated prices and tariffs.
The weakening of the ruble in June and July had no meaningful implications for annual inflation and inflation expectations, given its substantial strengthening observed since early this year. For inflation to become anchored close to the 4% target, sustainable decline in inflation expectations in required.
Monetary conditions. Monetary conditions are crucial in the efforts to bring about sustainably low inflation. They are adjusting to the key rate reduction. Interest rates on loans have declined but their level supports moderate demand for borrowing. Banks continue to adhere to a conservative policy by mitigating price and non-price lending conditions, primarily for reliable borrowers. The slowdown in the growth of household deposits mainly comes as a result of the declining paces of money supply growth, triggered by fiscal operations, rather than as a result of declining deposit rates. The Bank of Russia will continue to set such monetary conditions which will support the propensity to save and warrant balanced growth in consumption, thereby curbing inflation risks.
Economic activity. The economic activity is rebounding. Positive trends in industrial production are gaining momentum, freight turnover is growing, and construction has turned to recovery. Growth in household consumption expenditures went up along with the increase in investment and production. A moderate increase in consumer spending is not adding inflationary pressure as the supply of goods and services expands. Annual GDP is to grow by 1.3-1.8%.
At the same time, economic growth is nearing its potential level. It is constrained, among other things, by the situation in the labour market where shortages of labour force are already visible in some segments. Further GDP growth above 1.5-2% a year is attainable if structural reforms are put in place.
Inflation risks. Short-term inflation risks persist as regards harvest prospects and their impact on food prices and inflation expectations. Furthermore, volatility in global commodity and financial markets, as well as exchange rate dynamics amid elevated geopolitical risks may have negative implications for exchange rate and inflation expectations. 
The sources of medium-term risks remain unchanged. First, they are connected with further movements of oil prices which are lower than expected in the light of the agreements achieved. Legislative consolidation and implementation of the budget rule will mitigate these risks. Second, growth in the productivity of labour may lag considerably behind the wage growth as structural shortage of labour force aggravates. Third, inflationary pressure may stem from changes in households’ behaviour as their propensity to save can become considerably lower. Fourth, inflation expectations remain sensitive to changing prices of individual groups of goods and services and exchange rate movements. Fifth, the likely tax manoeuvre may result in a temporary acceleration of inflation.
These factors call for moderately tight monetary conditions to remain in place for a long time for inflation to become anchored close to target.
While making its decision hereinafter, the Bank of Russia will assess inflation risks, the inflation dynamics and economic developments against the forecast.
The Bank of Russia Board of Directors will hold its next rate review meeting on 15 September 2017. The Board’s decision press release is to be published at 13:30 Moscow time."


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