Russia cuts base rates by 50bps for first time in 12 months

June 13, 2016 (LBO) – Russia’s central bank has decided to cut the base rate by 50 basis points to 10.50 percent, the first rate cut since July last year, taking into account the positive trends in inflation. Releasing a statement, the Board of Directors of Bank of Russia noted the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy. The board said slowing inflation allows more certain reliance on sustainable inflation reduction to less than 5 percent in May 2017 and the 4 percent target in late 2017, taking into account the latest decision and the retention moderately tight monetary policy. The Bank of Russia said it will consider the possibility of a further rate cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory. The annual inflation has currently stabilized at 7.3 percent and the seasonally adjusted annualized monthly inflation is about 5 percent.
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The Bank of Russia marked down its inflation forecast for the end of 2016, to 5-6 percent. Considering the latest decision, the board expects the annual inflation to be less than 5 percent in May 2017 to reach the 4 percent target in late 2017. Analysts who had anticipated a rate cut pointed to a recovery in the price of oil, Russia’s key export, that helped the ruble to pare losses and mitigate inflationary risks. The Bank of Russia has set the monetary conditions moderately tight, despite a slight easing due to the lowering banking sector liquidity deficit. Interest rates adjusted for inflation expectations however will remain at the level that encourages savings and allows for demand for loans that does not cause an increase in inflationary pressure. The Bank of Russia is to mop up liquidity to ensure operational control over market interest rates in the context of the emerging transition to the banking sector liquidity surplus. The forecast for Russian economy predicts a GDP increase of 1.3 percent in 2017 and annual growth rate for output of goods and services remaining low in the following years. The forecast is based on a fairly conservative estimate of the annual average oil price, which is approximately 40 US dollars per barrel over the three-year horizon.