Friday, March 23, 2018

Russia cuts rate 25 bps, will continue to ease to neutral

      Russia's central bank lowered its key monetary policy rate by another 25 basis points to 7.25 percent, as widely expected, and confirmed it still expects to "continue to reduce the key rate and will complete the transition to neutral monetary policy in 2018."
       It was the Bank of Russia's second rate cut this year after six cuts in 2017.
       The central bank has now cut the key rate by 975 basis points since January 2015 when it slowly began unwinding a massive, 750 point rate hike in December 2014 that was aimed a protecting the ruble after it tumbled following the Ukraine conflict.
       In separate comments, Elvira Nabiullina, governor of the Bank of Russia, confirmed the neutral policy rate was still estimated to be 6 -7 percent. She said the central bank still hadn't reached the end of the easing cycle, and "we admit there is still potential for further reduction in the key rate."
       Analysts had widely expected the rate cut after inflation was steady at an all-time low of 2.2 percent in February and January, and after the bank's head of monetary policy, Igor Dmitriev, last Friday said he would recommend a rate cut to the bank's board.
      "Annual inflation remains sustainably low," and below the central bank's target of 4.0 percent for longer than expected, thus allowing for a quicker transition to a neutral monetary policy stance, the central bank said.
        Inflation is expected to continue to decelerate and hit a new low in the second quarter due to the comparison with high food prices last year but then rise in the second half of the year as domestic demand recovers further.
        For 2018 the central bank forecast that inflation would average between 3.0 and 4.0 percent and then be close to 4.0 percent in 2019.
        Looking at the factors driving inflation, the central bank said investments in agriculture and production are now reducing inflation's dependence on weather conditions, which is helping restrain the growth of food prices, while a new budget rule is reducing the sensitivity of the economy, the exchange rate and inflation to changes in oil prices.
       "We are already seeing a ruble exchange rate which is less sensitive to oil prices," Nabiullina said, but this also means that fluctuations in the exchange rate were previously consider a temporary factor and now its changes will have more of a fundamental nature.
       Although inflation expectations are falling, the central bank said they are still way above the inflation target and still sensitive to any possible increase in food prices.
        Nabiullina also said money market interest rates were currently below the bank's key rate due to a strong surplus of liquidity. This is likely to last for some time, she said, and while the central bank is taking this situation into account when making rate decisions, it is seeking to bring money rates closer to the key rate without constraining interbank credit.
        Russia's economy is also continuing to recover from recession in 2015 and 2016, with industrial production growing in January and February while investment and consumer demand is growing, supported by higher wages and expanded retail lending.
        The central bank forecast growth in 2018 to 2020 of 1.5 to 2.0 percent, around the country's potential, and revised upwards its oil price assumption to $61, $55 and $50 a barrel in 2018, 2019 and 2020, respectively, from its December forecast of $55, $45 and $42.
        In the third quarter of 2017 Russia's economy grew by an annual rate of 1.8 percent, down from 2.5 percent in the second quarter.
        Russia's ruble has been rising steadily since January 2016 and was trading at 57.15 to the U.S. dollar today, up 0.9 percent this year and up 7.2 percent since the start of 2017.

      The Bank of Russia issued the following statement:

"On 23 March 2018, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 7.25% per annum. Annual inflation remains sustainably low. Inflation expectations are diminishing progressively. The Bank of Russia forecasts annual inflation to be 3-4% in late 2018 and remain close to 4% in 2019. In this environment the Bank of Russia will continue to reduce the key rate and will complete the transition to neutral monetary policy in 2018.
In making its key rate decision, the Bank of Russia recognised the following factors. 
Inflation dynamics. Annual inflation remains sustainably low. In February 2018 it stood at 2.2%. Inflation remains below 4% longer than expected, allowing for a quicker transition to neutral monetary policy this year.
Factors, previously seen as mostly temporary, are becoming more persistent under the influence of the following structural changes. First, investments in agriculture and an increase in its production capacity reduce harvest’s dependence on weather conditions and have a restraining influence on food price growth. Second, the implementation of the budget rule lowers the sensitivity of domestic economic conditions, including exchange rate and inflation dynamics, to changes in oil prices. These developments make the stabilisation of inflation at low levels more sustainable and reduce the risks of significant fluctuations.
Current consumer price dynamics favour a decrease in inflation expectations of households and businesses, further contributing to keeping inflation at bay. However, households’ inflation expectations are still way above the inflation target, still sensitive to the possible increase in prices for certain goods, including food products.
The slowdown of annual inflation may continue in the first half of 2018. This partially results from last year’s high base effect of food inflation. Inflation will begin to gradually return to the target in the second half of the year, supported by further recovery of domestic demand. The Bank of Russia forecasts annual inflation to be 3-4% in 2018 and close to 4% in 2019. 
Monetary conditions. Monetary conditions continue to ease. Their disinflationary effect is gradually declining.
The interest rate dynamics were a key contributor to easing of monetary conditions. Real interest rates remain positive promoting savings. Non-price lending conditions for legal entities remain mostly constraining with banks still showing conservative approach to screening borrowers and increasing lending. The increase in mortgage and consumer lending does not pose any risks for inflation to rise above 4% so far.
The key rate decision and the potential for its decrease in the future will contribute to further easing of monetary conditions, thus supporting domestic demand and creating prerequisites for inflation to approach 4%.
Economic activity. Economic growth resumed in early 2018, following the decline due to temporary headwinds in late 2017. 
In January — February, the annual industrial production growth returned to the positive territory. The period also saw a continued growth in investment. The recovery in consumer demand is supported by rising real wages and expanding retail lending.
The Bank of Russia’s general perceptions of the Russian economy’s growth have remained unchanged. The Bank of Russia has slightly raised the oil price in its baseline scenario. However, it has not entailed any significant review of the Russian economy’s growth rate in the medium term due to its decreased sensitivity to oil price changes and remaining structural constraints. In 2018-2020, GDP will grow by 1.5-2%, which corresponds to the potential growth rate of the economy.
Inflation risks. The Bank of Russia’s assessment of inflation risks has not changed significantly, save for the risks posed by the labour market. The dynamics of wages and unemployment create prerequisites for potentially higher inflationary pressure. At the moment, the assessment of the duration and scale of effect of these drivers remains unclear. The Bank of Russia will pay particular attention to the situation in the labour market, including the impact of the dynamics of incomes and wages on consumer behaviour and inflation.
The Bank of Russia will also monitor risks posed by external factors, considering the episodes of increased volatility in the global markets on the back of monetary policy normalisation in other countries and growing uncertainty with respect to the trade policy.
The Bank of Russia Board of Directors will hold its next rate review meeting on 27 April 2018. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time."


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