Friday, December 11, 2015

Russia holds rate, but to cut as inflation, risks recede

    Russia's central bank left its key policy rate at 11.0 percent but essentially repeated its guidance from October that it "will continue with a downward revision of its key rate, to be decided at one of its forthcoming Board of Directors meetings" as inflation slows and the risks of inflation recede.
    The Bank of Russia, which has cut its rate by 600 basis points this year, said it it had decided to maintain the rate for the third board meeting in a row "in recognition of growing inflation risks, while the risk of economic cooling remain."
    Russia's inflation rate eased slightly to 15.0 percent in November and to 14.8 percent as of Dec. 7 from 15.6 percent in October but the slowdown was "somewhat" slower than expected and inflation expectations by households escalated last month, the bank said.
    But inflation should drop early next year in comparison with the jump in early 2015 as the ruble's exchange rate fell and is forecast to reach 6.0 percent in late 2016 and the bank's 4.0 percent target in 2017 as "the relatively though monetary conditions will drag down annual inflation in 2016-2017."
    The recent imposition of trade restrictions on some imports from Turkey following the shooting down of a Russian fighter jet is forecast to add about 0.2 to 0.4 percentage points to inflation until the end of this year and in early 2016, the bank added.
    "A slowdown in the consumer price growth will create prerequisites for decrease in inflation expectations," the bank added.
    The Russian ruble, which tumbled 45 percent in 2014 following the conflict with Ukraine, has been more stable this year and was trading at 69.9 to the U.S. dollar today for a 14 percent drop this year.
    The country's economy has been hard hit by the fall in crude oil prices and the imposition of Western sanctions and the bank expects the current trend of contracting industrial output, investment and consumer demand to persist in coming months.
    Russia's Gross Domestic Product contracted by an annual 4.1 percent in the third quarter, slightly better than a 4.6 percent fall in the second quarter and the central bank expects a gradual easing of financing conditions, lower debt and improved business sentiment in the second half of next year to slowly pave the way a recovery of investment and production in 2017 and then a revival of consumer demand in 2018.
    The central bank forecasts GDP to contract by 0.5 to 1.0 percent next year but then to expand by zero to 1.0 percent in 2017.
    In a separate statement, the bank's board of directors said they had decided to equate the bank's refinancing rate - which used to be its policy rate - with the key rate as of Jan. 1, 2016 and cease setting an independent value of the refinancing rate.

    The Bank of Russia issued the following statement:

"On 11 December 2015, the Bank of Russia Board of Directors decided to keep the key rate at 11.00 percent per annum, in recognition of growing inflation risks, while the risks of economic cooling remain. The annual pace of consumer price growth in the end of 2016 is estimated to be about 6%, on the way to reach the target of 4% in 2017. As inflation slows down in line with the forecast and on condition inflation risks recede, the Bank of Russia will continue with a downward revision of its key rate, to be decided at one of its forthcoming Board of Directors meetings.
In the November to early December 2015 period, inflation slowdown continued. The Bank of Russia estimates the annual growth pace of consumer prices to total 14.8% as of 7 December, on 15.6% in October. Seasonally adjusted monthly inflation was down from 0.9% between August and October to 0.7% in November. Consumer prices were rising slower thanks to the beneficial agricultural environment and a gradual exhaustion of the impact from the depreciation of the ruble of the July to August period, as well the weakness in consumer demand driven by low growth in nominal household incomes. The downturn in annual inflation is further explained by the sharp increase in consumer prices seen one year ago (the base effect). However, the slowdown in consumer prices occurred somewhat slower than predicted. In addition, inflation expectations of households escalated in November, although projected to decrease. 
The restraining pressure on prices also comes from the moderately tight monetary conditions. Money supply (M2) growth rates increased but still remain low. The downward trend in lending and deposit rates, driven by the Bank of Russia’s previous key rate reductions, has slowed down. Deposit and lending rates remain at the level which, on the one hand, serves to keep ruble savings attractive and, on the other hand, along with high debt burden and tightened creditworthiness requirements, is a factor behind low annual lending expansion.
According to Rosstat’s tentative estimates, the annual pace of GDP drop decreased in Q3. Having said this, the mixed dynamics seen in core macroeconomic indicators for October speak for instability of this trend. While industrial output and investment contracted at a slower pace than before, contraction in consumer demand accelerated. As demographic conditions remain negative, unemployment was still low; the labour market was adjusting to the new conditions largely through declining real wages and wider part-time employment.
The current trends are expected to persist in the coming months. The modest growth of household income and retail lending will continue to contain consumer spending. Investment activity will remain weak amid the persisting economic uncertainty and the relatively tough lending conditions. Investment demand is expected to be constrained also by limited potential substitution of external finance with domestic one, following the narrow nature of the Russian financial market and high debt load of companies. Investment is likely to be supported somewhat by the governmental turnaround programme. In an unfavourable environment in the global commodity markets, exports in value terms are expected to go down. At the same time a weaker internal demand will cause a more significant decrease in imports in value terms. As a result, net exports will be a positive contributor to the annual output growth. 
Further economic development will depend on the pace of the economy’s adjustment to the recent external shocks. According to the Bank of Russia’s forecast, gradual easing of internal financial conditions, lower debt burden and improved business sentiment in 2016 H2 will pave the way for investment and production recovery in 2017. It will consequently result in growing household income contributing to the revival of consumer demand in 2018. The GDP fall will slow to 0.5-1.0%in 2016. In 2017, the economic growth rate will stand at 0.0-1.0%.
The annual inflation will drop in early 2016 following its high value in early 2015, among other things. The external trade restrictions imposed against Turkey from January 2016 will not have a significant impact on consumer prices. These restrictions are estimated to add about 0.2-0.4 pp to inflation till the end of 2015 and in early 2016. The slack domestic demand and the relatively tough monetary conditions will drag down annual inflation in 2016-2017. A slowdown in the consumer price growth will create prerequisites for decrease in inflation expectations. According to the Bank of Russia’s forecast, the annual consumer price growth will stand at about 6% in late 2016, on track to reach the 4% target in 2017, facilitated by the current monetary policy. 
The key sources of inflation risks are possible further worsening of the external climate against the backdrop of persistently low oil prices, monetary policy normalisation by key central banks and continued slowdown in the Chinese economic growth. Besides, inflation reduction can be hampered by persistently high inflation expectations, and an upward revision, planned for 2016-2017, of rates and prices in the regulated sector, an upward revision of social payments indexation, as well as overall budget policy easing.
As inflation slows down in line with the forecast and provided that inflation risks recede, the Bank of Russia will continue with a downward revision of its key rate, to be decided at one of its forthcoming Board of Directors meetings.
The Bank of Russia will hold its next rate review meeting on 29 January 2016. 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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