Friday, April 27, 2018

Russia holds rate but still assumes it will ease further

      Russia's central bank left its key monetary policy rate at 7.25 percent after cutting it five times in a row after the ruble's plunge earlier this month triggered uncertainty over how this would impact inflation expectations.
      But the Bank of Russia, which has cut its rate twice this year and six times in 2017, remains confident that inflation will not overshoot its 4.0 percent target and that it will continue to lower rates this year even if the estimated neutral rate has moved slightly higher.
      Today's decision by the central bank's board was widely expected by financial markets after central bank officials said the fall in the ruble had lowered the likelihood of a rate cut today and the weaker ruble could spur inflation and inflationary expectations.
      Between April 9 and April 11 the ruble plunged 10 percent and Russian stocks by 9 percent in response to fresh sanctions by the United States for its alleged meddling in the 2016 presidential election and criticism by President Donald Trump over its support for the Syrian government, which was accused of launching a chemical weapons attack.
       But on April 10 Bank of Russia Governor Elvira Nabiullina said she would not step in to halt the ruble's slide, describing it as a market correction as investors were uncertain over the impact of sanctions, and the free float of the ruble would help absorb any external shocks.
       Deputy Governor Ksenia Yudayeva echoed Nabiullina's statement on April 16 and added the situation on the currency market was balanced and the central bank doesn't intervene purely due to volatility but only if there are risks to financial stability.
       The assurances by the central bank officials helped soothe investors' nerves but while Russian stocks have bounced back the ruble remains weaker than before the sanctions.
       In response to today's policy decision, the ruble firmed 0.5 percent to 62.5 to the U.S. dollar and is now up 3.4 percent since a low of 64.6 on April 11.
       But the ruble is still 7 percent below its pre-sanction level and down 7.7 percent since the start of the year.
       "The Bank of Russia estimates that the ruble weakening will quicken inflation movement to 4% without the risks of overpassing this level, unless the external environment changes considerably," the central bank said, confirming it still expects inflation in a range of 3-4 percent by the end of this year and then to remain close to 4.0 percent in 2019.
       Russia's inflation rate rose slightly to 2.4 percent in March from a record low of 2.2 percent in February and is estimated by the central bank at 2.3-2.5 percent in April, saying weekly data showed little response by consumer prices to the ruble weakening.
       Household inflation expectations also dropped to a historical low of 7.8 percent in March though the central bank said it was unclear how expectations would respond to financial market volatility.
       The weakening of the ruble should help boost inflation toward the 4 percent target earlier than expected, the bank said, adding that monetary policy is still expected to become neutral this year.
        The bank had estimated a neutral policy rate in a range of 6-7 percent but said today the potential size of further rate cuts was now smaller as the estimated neutral rate had shifted closer to the upper bound of this range given a rise in Russia's risk premium and the increase in interest rates in advanced economies.
        Economic activity in Russia is continuing to expand but is still posing little disinflationary pressure on consumer prices, paving a way for inflation to return to 4 percent.
        Output continued to expand throughout March, the bank said, forecasting economic growth in the first quarter of 1.3-1.5 percent and confirming its forecast for growth of 1.5-2.0 percent by the end of 2018, in line with the country's potential.

       The Bank of Russia issued the following statement:

"On 27 April 2018, the Bank of Russia Board of Directors decided to keep the key rate at 7.25% per annum. Annual inflation remains low. The April weakening in the ruble against the backdrop of geopolitical tension will be a factor for consumer price growth paces to quicken as they move closer to 4%. However, this does not create risks of inflation overshooting the target. At the same time uncertainty remains over the potential impact of the recent developments on inflation expectations. Inflation is forecast to range between 3–4% as of the end of 2018 and hold close to 4% in 2019.
The Bank of Russia still assumes that monetary policy will become neutral in 2018. At the same time, the Bank of Russia considers that the potential key rate reduction intended to bring about neutral monetary conditions has decreased given the rise in interest rates across advanced economies and country risk premium growth for Russia. Moving forward, in its decision-making the Bank of Russia will be guided by assessments of inflation risks, inflation dynamics and economic developments against the forecast. 
In making its key rate decision, the Bank of Russia recognised the following factors.
Inflation dynamics. Inflation remains low, driven by long-term factors including, in the first place, a moderate recovery in domestic demand. 
Consumer prices grew at the pace of 2.4% in March, and consumer price growth in April is estimated at 2.32.5%. The recent weekly data on inflation are indicative of a still feeble response of consumer prices to the ruble weakening. The gradual depletion of the past year’s vegetable stocks and the related growth in imports contributed to an expected slight increase in both monthly and annual inflation between March and April, relative to February. 
In March, household inflation expectations dropped to a historical low of 7.8%. That said, uncertainty is in place over how inflation expectations will respond to the April developments in financial markets. 
The Bank of Russia estimates that the ruble weakening will quicken inflation movement to 4% without the risks of overpassing this level, unless the external environment changes considerably. Inflation is forecast to range between 34% as of the end of 2018 and hold close to 4% in 2019.
Monetary conditions. The Bank of Russia’s estimates suggest that the potential for key rate reduction to shape neutral monetary conditions shrank somewhat. As the country risk premium increased and interest rates were revised upwards in advanced economies, the estimated neutral interest rate has shifted closer to its upper bound within the range of 67%. 
Economic activity. Business activity keeps on expanding and is hardly posing any disinflationary pressure on consumer price movements. This paves the way for inflation to return to 4%. Output growth continued throughout March, including industrial output, and capacity utilisation increased. Unemployment was close to its natural level. Economic activity is backed up by gradually recovering consumer demand as wages are growing and retail lending is expanding. 
GDP growth rate is estimated at 1.31.5% in the first quarter and 1.5-2% as of the end of 2018, which is in line with the potential economic growth rate. 
Inflation risks. The Bank of Russia registers a rise in inflation risks triggered by some internal and external factors. First, geopolitical factors and accelerated yield growth in advanced economies may cause surges in volatility in financial markets and affect expectations for the exchange rate and inflation. Furthermore, uncertainty still persists over the dimensions of fiscal decisions, which are needed to estimate the impact of such decisions on inflation. 
The Bank of Russia leaves unchanged its estimates of risks associated with consumer and oil price volatility, wage movements and possible changes in consumer behaviour.
In its key rate decision-making the Bank of Russia will be guided by assessments of inflation risks, inflation dynamics and economic developments against the forecast. 
The Bank of Russia Board of Directors will hold its next rate review meeting on 15 June 2018. The Board decision press release is to be published at 13:30 Moscow time."


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