Russian Central Bank keeps key rate at 10%

The Board of Directors of Russia’s Central Bank has decided to maintain its key rate at 10%, the bank said in its press release.

The regulator finds it necessary to keep the key rate on the current level until the end of 2016 to fix the trend for sustainable inflation decline, the regulator said.

At the same time the regulator notes that further lowering of the key rate is possible in the first-second quarter of 2017.

According to the press release maintaining the key rate at 10% for a rather long period of time will also form the monetary conditions which are necessary to keep incentive to savings. "This will create conditions for further decline in inflation expectations," TASS cited the regulator as saying.

According to the Central Bank the decline in inflation expectations remains unsteady. The risks are mainly related to the inertia of inflation expectations, possible weakening of household incentives to accumulate savings, as well as growth of real wages, which is not accompanied by an increase in labor productivity.

Besides that inflation expectations of market participants for the end of 2017 still higher than Russia’s target on inflation (4%), according to the press release.

The next meeting of the Board of Directors of the Russian Central Bank in 2016 is scheduled for December 16.

Advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, speaking to Vestnik Kavkaza, noted that the main reason behind the resistance to further decline the key rate is that inflation is still much higher than the target - "it was clearly a major motive". In addition, "the Central Bank, in general, does not see any reason in drastic rate cuts, as there is no high demand for money in the Russian economy. Under these circumstances, the rate cut will only cause inflation further to rise without stimulating the Russian economy. Therefore, this decision was absolutely predictable. And, most likely, it is premature to discuss the rate cut seriously before the second half of 2017".

At the same time, theoretically, the Central Bank may cut the rate, if inflation reduces to 4%. In practice, the "real solution to reduce the rate may be adopted, if representatives of big business use their lobbying resources to help lower the rate," the expert believes.

Commenting on the assumption that if the 2017 objective - inflation of 4% - is achieved, the key rate will go back to 5%, Hestanov refrained from giving any forecasts. "In any case, the Central Bank will change its key rate very slowly and gradually. It is hard to forecast possible consequences of the rate change in advance, but usual strategy is to have a slightly rate decrease followed by a long pause," the expert concluded.

An associate professor of Stock Markets and Financial Engineering of RANEPA, Vasiliy Yakimkin, in turn, noted that, firstly, a promise to maintain the rate at the current level prevented its further decrease.

"On the other hand, the US Federal Reserve System's policy, which has a direct impact on Russia's economy, is now in question. If the Federal Reserve System raises its rate in December, the ruble exchange rate will decline. Therefore, we have to support the ruble at least by a high rate, and, finally, the economy declines, so we need a lower rate," the expert said.

At the same time, a sharp decline in the rate may cause hyperinflation. "These are three drivers, which made the Central Bank to leave the interest rate unchanged," the economist explained.

Forecasting the conditions under which the Central Bank may cut the rate to 7-8%, the expert said that it may happen, if inflation reaches 4%. 

Commenting on the assumption that if the 2017 objective - inflation of 4% - is achieved, the key rate will go back to 5%, the economist noted that we should not expect this.