Russia’s central bank lowered its key monetary policy rate by 25 basis points to 7.50 percent and said it would continue to cut rates further as it moves toward a neutral policy stance this year as inflation is now sustainably low and inflation expectations continue to diminish.
It is Bank of Russia’s first rate cut this year and follows six rate cuts in 2017.
The central bank has now cut its key rate by 750 basis points since January 2015 when it slowly began rolling back a sharp 750 point rate hike in December 2014 aimed at protecting the ruble after it plunged in the wake of the Ukraine conflict.
Analysts had expected the rate cut following a drop in inflation to 2.2 percent in January, the lowest since measurements began in 1991, and well below the central bank’s 4.0 percent target.
And last week Elvira Nabiullina, Bank of Russia governor, then said rates could be cut faster than previously thought and as soon as today, adding she saw little economic or financial impact from possible new U.S. sanctions.
Nabiullina also said the central bank’s key rate could be brought to a neutral level of 6 or 7 percent sooner than the bank had planned as inflationary risks had eased.
The steady decline in Russia’s inflation rate from 2015 and the potential for further rate cuts will ease monetary conditions, setting up conditions for inflation to approach 4 percent and also enable the central bank to support domestic demand.
“This year annual inflation is much less likely to exceed 4%,” the central bank said, adding “in this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.”
The central bank expects inflation to continue to ease in the first half of this year due to the comparison with high food prices last year and then remain somewhat below 4 percent in 2018 and remain close to this in 2019.
The steady fall in inflation is helping curb inflation expectations though these still remain “unstable and uneven.” But this should decline as inflation falls and expectations become more anchored and less sensitive to sudden changes in food prices as in the past.
“Therefore the balance of inflationary and economic risks has slightly slightly towards the risks to economic growth,” the central bank said.
Russia’s economy pulled out of a deep recession last year though the pace of growth eased in the fourth quarter, the bank said.
But industrial output resumed its monthly growth in December and will be further supported by higher domestic demand as real wages rise and global economic growth expands.
Gross Domestic Product grew by an annual rate of 1.8 percent in the third quarter, down from 2.5 percent in the second quarter. For 2017 growth has been estimated at 1.5 percent, below the government’s aim for at least 2 percent growth.
Russia’s ruble has been rising steadily since January 2016 though it has depreciated in the last month. Today it was trading at 58.3 to the U.S. dollar, down 1 percent this year but up 3.8 percent since the start of 2017.
The Bank of Russia issued the following statement:
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