Russia to celebrate New Year with 10% key rate

The Board of Directors of the Russian Central Bank has decided to keep the key rate at 10% per annum at the today's meeting.

According to the regulator’s press release, the dynamics of inflation and economic activity in general, correspond to the forecast, inflation risks have declined slightly.

"At the same time, the growth rate of consumer prices slowed down partly due to the influence of temporary factors, and reduction of inflation expectations remains fragile," the regulator said.

Given the decision and preservation of a moderately tight monetary policy, inflation will slow down to the target level of 4% at the end of 2017.

The regulator also noted that it would consider the possibility of reducing the key rate in the first half of 2017 with consolidating a trend towards a steady decline of the inflation rate.

"Difficult monetary conditions will contribute to achieving the inflation target. The positive real interest rates will be maintained at a level, which will ensure the demand for loans, which do not lead to an increase in inflationary pressures, as well as preserve the incentives to save. But the potential of lowering interest rates in the near future is limited," the Bank of Russia said in the statement.

Annual inflation in Russia is decreasing. Thus, on 12 December 2016 it was 5.6% against 6.1% in October, 2016.

The report explained that the dynamics of the ruble exchange rate due to high oil prices, as well as the interest of foreign investors to invest in Russia's financial assets, continue their contribution to reduce consumer prices, TASS reports.

Russia's GDP growth in 2017 will be less than 1%, and will increase to 1.5-2% in 2018-2019. According to the regulator, the domestic economy is entering a phase of recovery growth, which corresponds to the baseline forecast of the Bank of Russia.

Advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, speaking to Vestnik Kavkaza, stressed that the Central Bank decided to keep the rate at the same level mainly for reasons of macroeconomic stability. 

"That is, the regulator fears that a significant increase in interest rates by the US Federal Reserve can have a negative impact on the ruble, and even provoke a currency panic. As for inflation, despite the fact that it is declining, it is still above the target indicators. Therefore, the Bank of Russia decided that the stability of inflation and the stability of the ruble are more important parameters under current conditions," the expert said.

That is why it is likely that the Central Bank will maintain a conservative policy as long as possible.

"Currently, the Central Bank's key rate is much higher than the market's rate, so the economic entities, which want to be funded, have such an opportunity on the repo market, or the bond market, where the rate is of 7-7.5%," he added.

In general, according to the analyst, the key rate has been extremely effective as an inflation control tool. "We have a record low inflation," the advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house explained.

Commenting on the connection between the dynamics of the Fed rate and the dynamics of the Central Bank's rate, the expert drew attention to its ambiguous nature. "Usually, the Central Bank tried to move the rate in the same direction as the Fed. But now the priorities of the Fed and the priorities of the Central Bank are very different. That is why there are no grounds for an absolutely direct correlation between the rate of the Federal Reserve and the policy of the Russian Central Bank. For the Central Bank now inflation and the stability of the ruble are more important, and the Fed's  very significant task is to deflate bubbles in the real estate market and the US stock market," Sergey Hestanov concluded.