Russia's Central Bank cuts key rate to 7.75%

The board of directors of Russia’s Central Bank cut its key interest rate by 50 basis points to 7.75% from 8.25%.

The central bank said it would also consider cutting the key rate next year because inflation had slipped below its 4% target to 2.5% in annual terms as of December 11.

"The Bank of Russia will continue its gradual transition from moderately tight to neutral monetary policy and holds open the prospect of some key rate reduction in the first half of 2018," the central bank said in a statement.

The central bank noted that the extension of an output cut agreement between oil-exporting countries lowered uncertainty on the global energy market and reduced related pro-inflationary risks over a one-year horizon. "However, the risks of upward deviation of inflation from the forecast in the medium term still prevail," it said.

The Bank of Russia board of directors will hold its next rate review meeting on February 9, 2018.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking with Vestnik Kavkaza, noted that it was the record low inflation in Russia which has helped accelerate the decline of the rate. "Inflation was below the expectations of the Central Bank, so by the end of the year, it is trying to balance the key rate and inflation , at least to reduce the gap between them. The second factor is the slowdown in the economy by the end of the year. And the third factor is that it is theoretically possible that the Bank of Russia wants to make life easier for banks," he listed.

Abramov expressed confidence that the Central Bank does not have a precise model of the correspondence between inflation and the key rate, and therefore it cannot reduce the rate immediately to the minimum allowable value. "The Central Bank is monitoring how it affects the foreign exchange market. The difference between the inflation rate and the key rate can be significantly less than 2-3% .In developed economies, the rate of inflation is even higher than the key rate. The Central Bank is now setting this barrier, observing the activity of participants. On the basis of this criterion, there is still a room for reducing the rate, as the profitability of operations in the foreign exchange market is still low, lower than the key rate," the expert pointed out.

The Associate Professor of the department of corporate finance, investment planning and evaluation of M.A. Limitovsky at RANEPA, Alexander Arshavsky, agreed with Abramov. "The Central Bank has several reasons for accelerating the reduction of the key rate. First, it lowered the inflation risk assessment. Second, it raised the outlook for the stability of the ruble," he said.

According to the expert, next year the Central Bank will continue to reduce the rate further, if inflation does not exceed 4%. "In principle, the Central Bank has repeatedly said that in the medium term, it will lower the interest rate, while it has never been determined at what rate this will be done," Alexander Arshavsky concluded.