The Bank of Russia, which introduced a "key" rate in September and no longer refers to its refinancing rate, said the rise in inflation was due to short-term factors and "if current macroeconomic tendencies continue, inflation is projected to decline further in 2014."
The bank did not issue any specific rate guidance, but said it would continue to monitor the risk to inflation and the downside risks to economic growth in making its policy decisions. Following the rise in October inflation, many economists abandoned their expectations that the bank would cut rates this year in order to stimulate economic growth.
Russia's headline inflation rate rose to 6.3 percent in October from 6.1 percent in September, exceeding the bank's upper limit due to a rise in fruits and vegetables, something the central bank described as "unusual for this season," along with a rise in prices for certain animal products.
This rise in inflation appears even more surprising to the bank as there is an absence of any significant demand-side inflationary pressures as economic output is below its potential level, one of the reasons that non-food prices and core inflation have been contained in recent months, the bank said.
Russia's central bank is moving toward an inflation-targeting regime, formally in February next year, and targets inflation of 5-6 percent this year.
Following is board meeting last month, the bank said inflation was expected to continue to slow down this year but inflation expectations also had to trend downwards in a more pronounced way in order for inflation to meet the bank's 5.0 percent goal in 2014.
Economic growth in Russia continues to remain low, with gross output below its potential level, the bank said. Production activity and the demand for investments remain subdued and it is too early to draw any conclusion about a change in the current trend, despite an improvement in producer confidence. Consumer demand, which is supported by growth in wages and retail lending, remains the major growth driver.
"Nevertheless, 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, while a substantial widening of the negative output gap is not forecast," the bank said.
Russia's economics ministry recently slashed its forecast for economic growth through 2030 due to weakening investment, exports and retail sales, saying drivers of fast economic growth pre-2008 had been exhausted. The ministry expects growth to average 2.5 percent a year, down from a previous forecast of 4.3 percent.
Russia's Gross Domestic Product contracted for the second consecutive quarter, shrinking 0.26 percent in the second quarter from the first, but compared with the same quarter last year, GDP still rose by 1.2 percent, the same rate as in the first quarter.
In September the bank adopted the rate for its one-week repo and deposit auctions as its main policy rate within a 2.0 percentage interest rate corridor. The ceiling for the corridor is the bank's one-day rate for liquidity provision and the bottom of the corridor is the one-day rate for liquidity absorption.
As in October, the central bank did not refer to its previous policy rate, the refinancing rate, which was maintained at 8.25 percent and will be gradually phased to the level of the key rate by 2016.
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