Central Bank of Russia maintains key interest rate at 11%

The Board of Directors of the Russian Central Bank has decided to keep its key interest rate at 11%, based on the results of its meeting today.

According to the press service of the Central Bank, despite certain stabilization on financial and commodities markets and inflation slowdown, inflationary risks are still high.

They are related to the oil market environment, continued high inflationary expectations and uncertainty over separate budget items, the Central Bank explained.

According to the forecast, Russia’s annual inflation will be less than 6% in March 2017 and 4% at the end of 2017.

Taking into consideration the key rate decision, the board of directors of the Bank of Russia relied on expectations of lower oil prices than in the December forecast. The oil market still has an excess of supply amid a slowdown in Chinese economic growth, increasing oil supplies from Iran and a fiercer competition for market shares. Thus the oil price recovery seen in recent weeks may turn out to be unstable. Russia’s Central Bank based its updated base rate forecast scenario on an average oil price of $30 per barrel for 2016 versus $50 per barrel in its previous scenario. The regulator said oil prices will gradually rise to $40 per barrel by 2018.

"Despite the oil price growth and strengthened ruble rate in recent weeks, accumulated ruble weakening under the influence of oil prices that collapsed at the end of 2015 - early in 2016 is still contributing to high inflationary expectations," the regulator said.

When deciding on the key rate, the Bank of Russia took into account that the dynamics of key macroeconomic indicators showed a smaller decline in the economy than previously estimated. The floating rate partially offsets the negative impact of external shocks to the economy, the Central Bank noted.

The next meeting of the Board of Directors of the Russian Central Bank in 2016 is scheduled for April 29.

The Associate Professor of the department of corporate finance, investment planning and evaluation of M.A. Limitovsky at RANEPA, Alexander Arshavsky, in conversation with the correspondent of Vestnik Kavkaza explained that today's decision of the Central Bank was due to its fears of increasing inflation, because the decline in the key rate may affect inflation. "That's how the central bank is motivating its actions now. The volatility of the currency prospects also has an impact, it is not known how long the strengthening of the ruble will last. The oil market can turn back at any point. That is, the instability of oil prices and the dollar exchange rate, as well as the volatility of inflation rates are the two main reasons for maintaining rates at the same level," he said.

According to the expert, "only a drop in inflation expectations, that is, a steady decline in the inflation rate and a decline in foreign exchange liabilities by the companies" could lead to a decrease in rates.

An associate professor at the Institute of Business Administration and Management of RANEPA, Candidate of Economic Sciences Teimuraz Vashakmadze, also explained the preservation of the rate by the fact that the Central Bank "doesn't want to provoke inflation".

However, he did not rule out the possibility of lowering the key rate at the end of the next meeting of the Board of Directors. As for the possibility of changing it in the course of the year, according to the expert, "if we will stay in this situation and no new incidents will happen, we can see the key rate at maybe 9%."