The building of the Bank of Russia in Moscow
Photo: Love Mishina for RBC
In comments following the meeting, the fed’s rhetoric remains tough. The Central Bank has indicated the persistence of high inflation expectations, confirmed his intention to return to the question of lower rates until 2017.
The Board of Directors of the Bank of Russia at the meeting on Friday, October 28, kept its key rate at 10%, reported in a press release of the Bank of Russia.
“To consolidate the trend towards a sustainable reduction of inflation, according to Bank of Russia estimates, it is necessary to maintain the current level of the key rate until the end of 2016, with the possibility of its reduction in the first and second quarter of 2017”, — stated in the release.
The regulator notes that a significant contribution to the slowdown in consumer prices bring temporary factors, and the decline in inflation expectations remains fragile. “Taking into account the adopted decisions and maintain a moderately tight monetary policy, the annual growth rate of consumer prices will be less than 4.5% in October 2017 and will fall to the target level of 4% at the end of 2017”, — underlined in the message of Bank of Russia.
The decision coincided with the consensus forecast of analysts surveyed by RBC. Ahead of the meeting they unanimously agreed that a rate cut in October will not. The experts noted that the forecasts were adjusted after the September meeting of the Board of Directors of the Central Bank. Then, lowering the key rate to 10% per annum, the Bank of Russia has promised not to change it at least until early 2017. In this case the regulator for the first time gave a clear signal to the market on further actions on the key rate.
At the end of October, the penultimate meeting in 2016, the Central Bank noted that, despite the measures taken, the inflation expectations of market participants at the end of 2017 still exceed the inflation target of 4%. According to the regulator, the correction in interest rates in the financial market contributed to maintaining a moderately tight monetary conditions that will persist in the economy long enough. However, the CBR believes that this will not affect the credit demand, incentives to save will also be saved. “Emerging signs of recovery of consumer credit not yet carry significant inflationary risks, given that significant part of loans is estimated to have been used for refinancing previously obtained loans,” — stated in the message.
Small positive GDP growth of Russia is expected in the fourth quarter of 2016. In 2017, economic growth will be low — less than 1%, says the Central Bank.
The decision to maintain the key rate shows that the Central Bank adheres to a strict policy, according to respondents RBC experts. Chief economist of “Renaissance Capital” Oleg Kuzmin, sees this as a positive factor that boosts investor confidence. “Firstly, the controller shows consistency in their actions, and secondly, investment in long-term bonds Russia continue to remain favorable, as the Central Bank continues to curb inflation”, — he said.
Economist for Russia and CIS, VTB Alexander Isakov notes that the comments to its decision, the Central Bank indicates improving demand from the population because of rising wages. The reduction of inflation, which was observed recently, was associated with a stable exchange rate, “saving model” behavior of the population and a good harvest, he said. “The sustainability of these trends creates a risk to achieve the target level of inflation,” he said.
Economists do not expect rate cut in December, at the last meeting in 2016. According to Kuzmin, despite the stability of the ruble and the economic recovery, long-term risks, particularly with fiscal policy, are preserved. “We do not expect rate cuts of the Central Bank before March 2017, the end of 2017, Central Bank rate can be reduced to 8%,” — said the chief economist of “Renaissance Capital”.
“The Central Bank has already prepared the participants’ previous comments that the rate will remain unchanged for a long time, so the impact on the markets, the regulator’s decision will have,” says economist BCS Vladimir Tikhomirov. He believes that the rate cut is not expected before February. “In December, the market expects the fed rate hike that will support the dollar. In these circumstances, the Central Bank hardly will begin to play against the ruble, particularly given that in December expected traditional growth in budget expenditures, which also puts additional pressure on the Russian currency,” — said the expert.
Isakov believes that the regulator may keep policy rate unchanged in the second half of 2017. “Otherwise, the Bank of Russia may begin to lower rates in February, but this decline will be gradual, at the level of 0.25 percentage points”, — he said.
A further easing of monetary policy will be tightly linked to the dynamics of inflation, agrees the Manager of research and Analytics PSB Alexander Polyutov. “Not going anywhere, and external factors that have the potential to accelerate inflation in the first place the policy of the U.S. Federal reserve rates as well as the dynamics of oil prices,” he recalls.
In 2016, the Central Bank reduced the key interest rate twice. June 10, the regulator lowered it from 11 to 10.5% by changing the level of rates for the first time from August 2015. The second reduction of the key rate, to 10%, occurred at the meeting on 16 September.