The board of directors of Russia’s Central Bank has decided to cut its key interest rate from 14% to 12.5%, given that inflation risks continue to abate. “Amid ruble appreciation and a significant contraction in consumer demand in February-April 2015, monthly consumer price growth is declining and annual inflation is tending to stabilize,” the Central Bank said in a statement.
According to the forecast of the Central Bank, inflation will slow “faster than expected." Annual inflation will reach 8% in April 2016. The Central Bank’s medium-term inflation target is 4% for 2017. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.
As of April 27, price growth eased to 16.5%. The existing high level of annual inflation is caused by the effect of short-term factors: the weakening of the ruble in late 2014-January 2015 and trade restrictions. However, in March-April the monthly growth rate of consumer prices fell to 1.0% from 3.1% in January and February, there were signs of stabilization in the annual inflation rate. Slower growth in consumer prices was also contributed to by monetary conditions.
Current economic conditions will help to reduce inflation. An additional deterrent effect on consumer prices will continue to assist the strengthening of the ruble. Inflation is expected to decline in monthly and in annual terms, while slower growth in consumer prices will create the preconditions to reduce inflation expectations.
The deputy chairman of the State Duma Committee on Financial Markets, Anatoly Aksakov, told Vestnik Kavkaza that today there are all the conditions to reduce the key rate by another half of a percentage point, but also welcomed the decision of the Central Bank's rate of 12.5%. "This is a good step, justified and reasonable. I would like a more substantial decline, but this is only our desire – perhaps the Central Bank has more information on the situation in the market. Maybe this cut was done in order not to heat up the optimistic expectations of the market. This decision will lead to a lowering of interest rates, including for mortgages and other borrowers, which is necessary for credit support of our economy," he stressed.
According to Aksakov, to the end of 2015 the key rate may be reduced to 8.5%-9%. "The government's actions are only beginning to be implemented. Accordingly, they will produce tangible results in the economic situation by the end of year. So there will be no shocks such as we saw in December and January last year," Aksakov concluded.
