Bank of Russia's Central Bank cuts key rate for first time this year

Bank of Russia's Central Bank cuts key rate for first time this year

The board of directors of Russia's Central Bank has cut its key rate by 25 bp to 7.5% per annum, for the first time since March 2018, the regulator said in a press release.

"Annual inflation slowdown is continuing. In May, households’ inflation expectations and business price expectations did not materially change and remain elevated. Economic growth in the first half of 2019 is lower than the Bank of Russia’s expectations. Short-term proinflationary risks have abated compared to March," the regulator said.

The central bank added more rate cuts were likely in the next few months.

"If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to neutral monetary policy until mid-2020," Reuters cited the bank's statement as saying.

The bank said inflation was on track to slow towards the 4% target quicker than previously expected.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on July 26, 2019. 

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking to Vestnik Kavkaza, noted that after a long-awaited cut in the key rate, we can expect a gradual, albeit insignificant reduction in rates of commercial banks. "It is possible that now banks will start lowering deposit rates, and then, after some time, credit rates will also go down. This is exactly what to expect from today's decision of the Russian Central Bank," he said.

Meanwhile, further reduction of the key rate is not yet expected. "I think the Central Bank will not rush to it, because there are alarming indicators regarding the overdue debts of individuals, especially in consumer loans. In fact, the society expected a gesture from the financial authorities, and now it has received it. And yet, I think that the Central Bank is not yet ready for such a trend of cutting rates. Today we saw rather some kind of symbolic move," Alexander Abramov stressed.

Professor of the RANEPA faculty of Finance, Money Circulation and Credit Yuri Yudenkov, in turn, noted that by this key rate cut, the Central Bank sends a signal that the peak of inflation has been passed. "The Central Bank is more optimistic about the future now. Today, the situation changed for the better, the economy is more stable. Even the World Bank assesses our banking system as stable. Therefore, the risks are well thought out, which make the entire credit and financial market more optimistic," the expert said.

At the same time, he stressed that it is too early to say how the market participants will perceive this signal from the Central Bank. "7.5% is not a reason for joy. If the loan rate were 2.5%, then it would have had a noticeable effect. And the cut from 7.75% to 7.5% is like moral support, which shows  the willingness to cut further," Yuri Yudenkov explained.

In addition, he expressed doubt that the Central Bank will once again take a long wait and will keep the rate at 7.5% till the next year. "If there is movement in the Russian economy, then the key rate will be lowered," the Professor of the RANEPA faculty of Finance, Money Circulation and Credit concluded.