The Board of Directors of the Bank of Russia decided to lower the key rate by 25 bpts. up to 8.25% per annum. The regulator believes that the current deviation of inflation down from the target level of 4% is due to time factors, and inflation expectations remain elevated. At the same time, the medium-term risks of exceeding inflation targets prevail over the risks of a steady deviation of inflation down.
“By taking a decision on the key rate, the Bank of Russia will assess the balance of risks of a significant and sustained deviation of inflation up and down from the target, as well as the dynamics of economic activity relative to the forecast. The Bank of Russia admits the possibility of further lowering the key rate at the next meetings, “sums up the Central Bank.
This approach means that in December at the last meeting this year, the Bank of Russia is likely to lower the rate by the same 25 basis points to 8% per annum. This will fully coincide with the forecasts of analysts and market participants who accurately predicted the decision of the board of directors on October 27.
“We think that the Bank of Russia is quite satisfied with the rate of inflation in the range from slightly less than 3% to 4%. Inflationary risks in the Central Bank are perceived asymmetrically: the actual acceleration of inflation and the weakening of the ruble have a greater impact on inflation expectations than the disinflation and strengthening of the national currency. The Bank of Russia, apparently, is not ready for a decisive reduction in interest rates, even if inflation falls below 4%, and when it is above this level, the regulator prefers a wait-and-see attitude, “analysts of Sberbank CIB said in particular.
The annual inflation of the assessment, which leads the Central Bank, was as of October 23, 2017, 2.7%, with a target level of 4%. Deflection of inflation down from the forecast is mainly due to time factors, the regulator believes.
In September, the decline in the annual rate of increase in food prices was more significant than expected, due to increased supply of agricultural products. The additional offer was due to increased yield and a shortage of storage capacity for its long-term storage. The slowdown in inflation was also due to the influence of exchange rate dynamics.
The ruble exchange rate remains stronger than the government’s expectations. In October, the Ministry of Economic Development expected the weakening of the Russian currency to 60.8 rubles per dollar from 57-58 rubles. The cost of a barrel of Russian Urals oil was projected at $ 51 per barrel.
But these predictions, most likely, will not come true. Oil on the day of the meeting of the Board of Directors of the Central Bank surpassed the mark of $ 59 per barrel of Brent, respectively, Urals is now $ 56-57 per barrel. The exchange rate also holds around 58 rubles per dollar and continues to maintain low inflation.
The Central Bank believes that soon the temporary factors will exhaust their influence, and the inflation rate will rise. The regulator also notes that inflation expectations remain high.
“Inflation will be about 3% at the end of 2017 and in the future as the influence of temporary factors is exhausted, it will approach 4%,” the press release says following the meeting of the Board of Directors.
The report also says that a number of factors carry the risks of deflecting inflation both up and down from the target. In the short term, such a factor is the change in food prices under the influence of the dynamics of supply of agricultural products.
In the coming months, the rate of growth in food prices will largely depend on the quality and conservation of the crop.
Medium-term risks are associated with the dynamics of prices on world commodity and commodity markets in case of their significant deviation up or down from the prerequisites of the CBR forecast.
At the same time, medium-term risks of inflation exceeding targets prevail over the risks of a steady deviation of inflation down, the regulator believes.
The Central Bank points to three main risks. First, strengthening the structural deficit of labor resources can lead to a significant lag in the growth rates of labor productivity from the growth of wages. Secondly, the source of inflationary pressure may be a change in the behavior of households, associated with a significant decline in the propensity to save. Thirdly, inflation expectations remain at an increased level and are subject to fluctuations under the influence of changes in prices for certain groups of goods and services and exchange rate dynamics.
Original in Russian: Gazeta.ru