Friday, March 13, 2015

Russia cuts rate 100 bps, further cuts as inflation falls

    The Russian central bank cut its key policy rate by another 100 basis points to 14.0 percent, a move that again took many economists by surprise, and said it "will be ready to continue cutting the key rate" as the risks of inflation abate further.
    The Bank of Russia has now cut its rate by 300 basis points this year, including January's 200 point cut which took financial markets by surprise as inflation has continued to accelerate.
    But the central bank said the policy rate was lowered because the balance of risks had shifted towards a more significant cooling of the economy and today's rate cut would address this risk without increasing inflationary pressures.
     Economic growth in Russia is forecast to contract by 3.5 to 4.0 percent in 2015 after expanding by a little more than 0.5 percent in 2014 as the fall in oil prices and Western sanctions over the conflict with Ukraine dented economic activity.
    "Thus, the current economic situation sets a trend towards inflation reduction," the central bank said as it expects investments to contract further, wages to continue to fall amid persistently low oil prices and the inability of Russian borrowers to access foreign capital markets.
     In response to the conflict with Ukraine, the fall in oil prices and lower growth, the Russian ruble currency has fallen sharply, boosting inflation. Last year it tumbled 53 percent against the U.S. dollar and continued to fall in January in response to a worsening of the conflict and lower oil prices.
    But since February the ruble has started to bounce back, with a Ukrainian cease fire agreement adding further support. Today the ruble was trading at 60.9 to the dollar, down only 1.6 percent since the start of this year but still down 46 percent since the start of 2014.
    Russia's inflation rate rose to 16.7 percent in February and was steady at 16.7 percent as of March 10, the central bank said.

    However, the central bank described the two main reasons for higher inflation - depreciation of the ruble and trade restrictions - were "supply-side factors" whose impact is short term and will be exhausted before the end of 2015.
    At the same time the demand factors that are pushing up inflation were showing a "pronounced downward trend" so the inflation rate was likely to slow to 9 percent by March 2016 and decline further to reach the bank's target of 4.0 percent in 2017.
    A surge in consumer spending in January was merely temporary, the central bank said, adding that real wages continued to fall in January and consumer spending declined sharply.
    Expectations that the Bank of Russia would cut its rate today were boosted last week when the central bank's new monetary policy chief, Dmitry Tulin, raised the possibility of a rate cut by saying the bank's policy stance was tight and there were signs that inflationary expectations were easing and the central bank still expects inflation to decline soon.

    The Bank of Russia issued the following statement:

"On 13 March 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 15.00 to 14.00 percent per annum taking into account that the balance of risks is still shifted towards a more significant cooling of the economy. This decision will contribute to the reduction of these risks without posing an additional threat of increased inflationary pressure. According to Bank of Russia forecast, the current monetary policy and low economic activity will be conducive to the slowing of annual consumer price growth to 9% over the year (March 2016 on March 2015) and to the target of 4% in 2017. As inflation risks abate, the Bank of Russia will be ready to continue cutting the key rate. 
As of 10 March, annual consumer price growth rate stood at 16.7%. Core inflation increased to 16.8% in February, while monthly consumer price growth declined from 3.9% in January to 2.2% in February. The high level of annual inflation is caused primarily by the supply-side factors, i.e. the ruble depreciation and external trade restrictions. Their impact is short-term and will be exhausted before the end of 2015. At the same time, demand-side inflation factors’ dynamics show a pronounced downward trend. A surge in consumer activity at the end of last year was temporary. January 2015 saw a continued fall in real wage growth and a sharp decline in consumer expenditures which exerts a restraining influence on the prices of goods and services.
Current monetary conditions will contribute to consumer price growth decline. Annual money supply (M2) growth rate decreased considerably as compared with the beginning of 2014. Given lending rates hike and tighter borrower and collateral requirements, annual lending growth (adjusted for currency revaluation) slowed down. Despite the key rate cut, it remains rather high for the deposit rates to support the public’s propensity to save. 
Structural factors continue to exert a restraining influence on economic growth, however, its slowing is becoming more and more cyclical. Weak economic activity will be conducive to inflation reduction. Further decrease in output is expected amid persistently low oil prices and foreign capital market inaccessibility for Russian borrowers. Fixed capital investments will continue to contract due to high prices for the imported investment goods, deterioration in companies’ financial performance, tighter lending conditions, and high economic uncertainty. The labour market will adjust to new conditions largely through real wage decrease and part-time employment, which along with a slowdown in retail lending growth will result in lower consumer demand. The ruble depreciation will partially mitigate the negative impact of changed external conditions, raising the competitiveness of Russian goods and containing imports along with slack domestic demand. As a result, only net exports will make a positive contribution to output growth. According to Bank of Russia estimates, GDP will fall by 3.5-4.0% in 2015.
Thus, the current economic situation sets a trend towards inflation reduction. According to Bank of Russia forecasts, monthly consumer price growth will continue slowing down. At the same time, given the short-term factors and due to the low base effect, annual inflation will grow with a peak in the second quarter of 2015. A slowdown in annual consumer price growth will be conducive to inflation expectations decrease. According to Bank of Russia forecast, annual inflation will fall to about 9% over the year and to the target of 4% in 2017.
High inflation expectations, review of planned increases in administered prices and tariffs, budget policy easing, and also possible accelerated growth in nominal wages inter alia in the budget sector, are the key risks for inflation dynamics. As the said risks abate, the Bank of Russia will be ready to continue cutting the key rate. 
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 30 April 2015. The press release on the Bank of Russia Board of Directors’ decision is to be published at 13:30, Moscow time."


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