Bank of Russia radically lowers key rate

The board of directors of Russia's Central Bank cut the key rate by 50 basis points to 6.5% today.

"Inflation slowdown is overshooting the forecast. Inflation expectations continue to decrease. The Russian economy’s growth rate still remains subdued," the regulator said in a statement.

At the same time, the regulator cut its annual inflation forecast from 4-4.5% to 3.2-3.7% for 2019 and to 3.5-4% for 2020. "The Bank of Russia has lowered its annual inflation forecast for 2019 from 4-4.5% to 3.2-3.7%. Meanwhile, annual inflation will be slightly below 3% in Q1 2020 when the effect of the VAT rate hike is factored out from the calculation of annual inflation. Given the monetary policy stance, annual inflation will come in at 3.5-4% in 2020 and will remain close to 4% further on," the statement said.

Inflation slowdown is overshooting the forecast, the regulator noted. The annual growth rate of consumer prices declined to 4% in September (from 4.3% in August 2019) and was close to 3.8% according to the estimate as of 21 October.

In September-October, disinflationary factors had a more pronounced influence on the slowdown of price growth rates than estimated before. Meanwhile, pro-inflationary risks related to external conditions did not materialize, the regulator said.

"Taking into account one-off factors amid a good harvest and expanded supply in individual food market segments, seasonally adjusted food price growth rates remained low. The ruble appreciation since the beginning of the year alongside with inflation slowdown in Russia’s trading partners limits the price growth of imports. In addition, the impact of subdued demand on inflation is becoming increasingly strong," the statement said.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on December 13, 2019.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking to Vestnik Kavkaza, explained that following a decrease in the key rate, they should first cut rates on ruble deposits the same way, and in month or two - loan interest rates.

The expert noted that if inflation reaches 4% at the end of the year, the Central Bank may reduce the rate to 5%. "Sberbank and VTB analysts suggest that it would be good to cut the rate by another 0.5 percentage points at the upcoming December meeting. It seems to me that this is quite realistic, its can be safely cut to 6% - 5.5%," he said.

"On the other hand, I would not give unambiguous forecasts. At the end of the year, the Ministry of Finance will finance various projects, therefore, inflation is likely to begin to rise slightly by the end of the year," Alexander Abramov said.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA, former deputy chairman of the Central Bank of Russia Konstantin Korischenko, in turn, noted that lowering the key rate to 6.5% will positively affect loan interest rates and deposit interest rates.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA also emphasized that the key rate of 6.5% is not the limit. "With this level of inflation, a key rate can be expected at 5%. But of course, it will not happen this year," he explained.

According to the former deputy chairman of the Central Bank of Russia, next time the key rate will be cut at the next meeting of the Central Bank. "As for 2020, the situation will be determined not so much by inflation as by sanctions and trade wars. An of course oil prices," Korishchenko concluded.