Russia’s central bank kept its key interest rate unchanged at 7.75 percent, as largely expected, but warned inflation is likely to rise further in coming months and future policy decisions will hinge on whether last year’s two rate hikes were sufficient to bring inflation back to the target in 2020.
In December the Bank of Russia raised its rate by 25 basis points in what it described as a proactive move to limit elevated risks to inflation following a similar-sized hike in September.
These two rate hikes came after the central bank had been on a steady path of policy easing from January 2015 to April 2018 during which the key rate was cut by a total of 9.75 percentage points.
But a combination of higher import prices from ruble depreciation, higher food prices, and a rise in consumer prices ahead of the January 1 rise in value-added-taxes (VAT) to 20 percent from 18 percent pushed up inflation steadily in the second half of last year to 5 percent in December.
Inflation remained unchanged at 5.0 percent in January, the central bank said, adding the contribution of the VAT rise to inflation last month was moderate and the full impact of the VAT increase can not be fully captured until April.
“The balance of risks remains skewed towards pro-inflationary risks, especially over a short-term horizon, driven by the VAT increase and price movements in individual food products,” the central bank said, adding there is also uncertainty over external conditions and their impact on financial assets while there is a high risks of the supply of oil exceeding demand this year.
The central bank expects inflation to temporarily accelerate and peak in the first half of this year before easing to 5.0 – 5.5 percent by the end of this year and then return to the target of 4.0 percent in the first half of 2020 as the effects of the ruble’s weakening and the VAT rise disappear.
The first estimates of Russia’s economic growth last year show 2.3 percent, above the central bank’s estimates of 1.5 – 2.0 percent, but it added the growth in economic activity had slowed in recent months and there was a decline in the growth rate industrial production, construction, real wages and retail sales in December.
However, the central bank maintained its forecast for 2019 growth of 1.2 – 1.7 percent as government spending will help boost investment this year, offsetting some of the constraining impact from the VAT rise.
Russia’s ruble, which fell in the first half of 2018 and then bounced back following the central bank’s September rate hike, firmed in response to the central bank’s policy decision today and was trading at 65.8 to the U.S. dollar to be up 5.8 percent this year.
The Bank of Russia released the following press release: