The days when Russia scrambled to prevent the plunge in its currency in December of 2014, pushing its interest rate to an eye watering 17%, are now a distant memory: moments ago, the CBR announced [7]that following the most recent cut from 15% to 14% on March 13 [8], it once again cut rates by a greater than consensus 150 bps, to 12.50%. The majority of analysts, or 25 of 40, had expected a cut to only 13.00%.
The reason for the bigger than expected cut: "lower inflation risks and persistent risks of considerable economy cooling. Amid ruble appreciation and significant contraction in consumer demand in February-April 2015, monthly consumer price growth declines and annual inflation tends to stabilise."
The immediate reaction has seen the USDRUB retrace some of its losses suffered earlier today.
[9]
Full statement [7]:
On 30 April 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 14.00 to 12.50 percent per annum, taking account of lower inflation risks and persistent risks of considerable economy cooling. Amid ruble appreciation and significant contraction in consumer demand in February-April 2015, monthly consumer price growth declines and annual inflation tends to stabilise. According to the Bank of Russia forecast, consumer price growth will slow down faster than expected. Annual inflation will fall to less than 8% in a year (April 2016 on April 2015) and to the target of 4% in 2017. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.
According to Bank of Russia estimates, as of 27 April, annual consumer price growth rate stood at 16.5%. High rates of annual inflation are conditioned primarily by short-term factors: ruble depreciation in late 2014 — January 2015 and external trade restrictions. Meanwhile, monthly consumer price growth is estimated to have declined on the average to 1.0% in March-April from 3.1% in January-February, and annual inflation tends to stabilise. Lower consumer demand amid contracting real income and ruble appreciation in the recent months curbed prices. Inflation expectations of the population decreased against this backdrop.
Current monetary conditions also facilitate the slowdown in consumer price growth. Money supply (M2) growth rate remains low. Lending and deposit rates are adjusted downwards under the influence of previous Bank of Russia decisions to reduce the key rate. However, they remain high, on the one hand, contributing to attractiveness of ruble savings, and, on the other hand, alongside with tighter borrower and collateral requirements, resulting in lower annual lending growth.
The dynamics of the major macroeconomic indicators show a considerable GDP contraction in 2015 Q1. Though structural factors continue hampering the economic growth, output contraction is currently mostly of cyclical nature. It is attested, among other things, by the on-going decline in production capacity and labour force utilisation, and a certain rise in the unemployment rate. According to Bank of Russia estimates, the labour market adjusts to the new conditions mostly through wage decrease and part-time employment. These factors, alongside with a decrease in retail lending, will result in further decline in consumer activity. Fixed capital investments will continue to contract due to persistently high economic uncertainty, deterioration of companies’ financial performance, tighter lending conditions, limited ability to replace foreign sources of funding with domestic ones given shallow Russian financial market, as well as high prices for imported investment goods. Sluggish domestic demand will contain imports. Net exports will be the only factor to make a positive contribution to the output growth. These factors will lead to a fall in GDP in 2015. Later on, as import substitution expands, sources of funding gradually diversify, lending conditions ease, and oil prices rise to some extent, the quarter-on-quarter GDP growth is expected to recover.
Thus, the current economic conditions will contribute to inflation decline. The ruble appreciation will have additional restraining influence on consumer prices. Inflation, both monthly and annual, is expected to gradually decline. A slowdown in consumer price growth will make room for inflation expectations decrease. According to the Bank of Russia forecast, annual inflation will slow down to less than 8% in a year and to the target of 4% in 2017.
Inflation risks emanate primarily from persistently high inflation expectations, aggravation of external economic situation, revision of planned increases in administered prices and tariffs, fiscal policy easing, and accelerated growth in nominal wages, including those in the public sector. As inflation risks abate further, 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 15 June 2015. The press release on the Bank of Russia Board of Directors’ decision is to be published at 13:30, Moscow time.
