Russian Central Bank's cautious rate cuts continue

Russian Central Bank's cautious rate cuts continue

The board of directors of Russia's Central Bank has cut its key rate today by 25 bp to 7.25% per annum.

"Inflation slowdown is continuing. At the same time, inflation expectations remain elevated. Russian economy’s growth rate is coming in lower than the Bank of Russia’s expectations," the Central Bank says.

"Poor economic activity along with temporary factors limits inflation risks over the short term horizon," the regulator noted.

The bank's move puts the rate back at a level where it was before a hike in September last year, something the central bank said was possible due to abating inflationary pressure. That, it said, should help it hit its inflation target of 4% in early 2020.

If the situation develops in line with the basic forecast, the Bank of Russia admits the possibility of a further reduction of the key rate at one of the upcoming meetings of the Board of Directors and a transfer to a neutral monetary policy in the first half of the next year.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on September 6, 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 when making decisions, the Central Bank was mainly focused on the external international background, instead of internal events in Russia.

"The recent IMF report published in June contains recommendations to central banks, including those in developing countries, to lower rates slightly. It seems to me that the Bank of Russia is more looking at the IMF recommendations than on the needs of the domestic economy. Because it is symbolic and reflects the general trend rather than the desire to pursue some kind of economic policy within Russia," the expert noted.

According to him, today the optimal rate level is inflation plus a few percentage points. "Relatively speaking, it's 4% plus 2 is 6%. That is, this decrease should be more noticeable than 0.25%," the professor at the department of the stock market and investments at the Higher School of Economics stressed.

He also suggested that the Central Bank will continue to cut the rate at the next meetings. "Inflation is declining, this is also a global trend. The consumer demand is not growing. This is holding back inflation both in Russia and in the world. Therefore, the Central Bank has large reserves to cut the interest rate," Abramov concluded.

Professor of the RANEPA faculty of Finance, Money Circulation and Credit Yuri Yudenkov, in turn, stressed that the decision to cut the rate at today's meeting was expected.

"Both our and foreign experts said that key rate cuts are necessary now, it will allow the real sector to increase the volume of capital investments. But the fact is that we do not know how much the rate affects the economy. Therefore, on the one hand, the Central Bank’s calculations are logical that access to cash must be facilitated under the conditions of stable economy and the need to develop industry. But on the other hand, prices may rise, that is, inflation may accelerate," the expert said.

At the same time, he expressed opinion that the key rate should be left at the current level until November. "The new fiscal year will begin in the U.S. soon, new funds will be formed. And one of the ideas of U.S. leaders is to drop the dollar, which would hit all currencies. Personally, I would wait until September. Although 0.25% is not very critical. Nevertheless, this means the Central Bank's stance," Yudenkov concluded.