Russia's Central Bank expectedly keeps key rate

The board of directors of Russia’s Central Bank decided to keep the key rate at 9% per annum, the regulator said in a press release.

The board of directors noted that inflation remains near the target level, and the recovery of economic activity continues. At the same time, short-term and medium-term inflation risks remain.

"Inflationary expectations were temporarily suspended, which was a predictable reaction to dynamics of prices for a number of goods and services. In order to maintain inflation near the target value of 4%, the Bank of Russia will continue to pursue a moderately tight monetary policy," the press release says.

The next meeting of the board of directors of Russia’s Central Bank in 2016 is scheduled for September 15.

A professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking to Vestnik Kavkaza, said that when deciding to keep the key rate at 9%, the Central bank was guided by measure of inflation. "First of all, it was unexpectedly high for them in June - 4.4%. Most likely, it will increase in July, because the housing and communal services tariffs and some transport tariffs have been changed since July 1. It seems to me that now they simply fear for inflation," the expert explained.

"If inflation drops to 4% and will stay at this level for a certain number of months, then they will probably start lowering the rate. It is the main reference point for the Central Bank now," the economist believes.

The expert also shared his opinion on the optimal level of the key rate in the current conditions. "If they reduce the rate too much, the fate of excesses of ruble liquidity that has accumulated in banks will be unknown. Therefore, in theory, the ratio between the key rate and inflation should be + 1-2 percentage points. Accordingly, if inflation is 4.5%, the rate should be 5.5-6%. But it will not happen in Russia soon. The Central Bank is too puzzled by the issue of inflation now," Alexander Abramov concluded.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA, Konstantin Korischenko, noted that the Bank of Russia's decision not to change the key rate was take due to political risks, uncertainty with oil prices, the weakening of the ruble and, as a consequence, the risk of rising inflation.

In addition, he pointed out that the Central Bank will agree to reduce rates only when these risks are reduced or completely disappear. "Today, the level of the key rate, unfortunately, is quite high," Konstantin Korishchenko concluded.