UPDATE3: Russian cbank reduces key rate to 7.25% from 7.5%
(Adds comments of Nabiullina, details of cbank’s research note throughout)
MOSCOW, Mar 23 (PRIME) -- The board of directors of Russia’s central bank has reduced the key interest rate by 0.25 percentage points to 7.25% and promised to cut it further to move to a neutral monetary policy in 2018 as inflation has fallen below 4%, the regulator said in a statement on Friday.
“We see potential for further reduction of the key interest rate. We plan to complete the move to the neutral policy this year,” Chairwoman Elvira Nabiullina told reporters.
She added that the regulator currently sees the interest rate of 6-7% annually as well-balanced, but may change its assessment in new conditions.
“Factors which were earlier seen as temporary have become more persistent due to a number of structural changes. First, investment in agriculture and expansion of its productive potential reduced dependence of harvest on weather conditions and restrain food inflation, second, the use of the budget rule makes internal economic conditions less sensitive to oil price fluctuations,” the central bank’s statement read.
“All these factors make the process of inflation stabilization at low levels more permanent and reduce the risks of considerable fluctuations.”
The central bank expects annual inflation to amount to 3-4% at the end of 2018 and to stand at around 4% in 2019.
“Annual inflation is steadily low… It amounted to 2.2% in February… Inflationary expectations gradually decrease,” the regulator said.
“Annual inflation deceleration may continue in January-June which is partially linked to a high base effect of last year’s food inflation. Inflation is to return gradually to the target level in July-December due to further recovery of internal demand.”
The central bank said in a research note that consumer demand will continue to grow until June forcing inflation to reach the target level of 4%.
Nabiullina said that annual inflation may stand at 2% in April-June and that the central bank will take measures to push it to the annual rate of 4% if it “stalls” at 2-2.5%.
She also said that 60% of companies base their plans on inflation of below 4%, but people’s inflationary expectations remain high which may drive inflation up.
The central bank added that a rise in mortgage and consumer loaning is not seen as a factor of pushing inflation above 4%.
Nabiullina said that Russia’s mortgage rates will decrease gradually and are likely to stay above a key rate range of 6-7% and that the central bank is discussing higher risk ratios on unsecured loans and will continue tighten regulation to prevent non-quality mortgage crediting from growth.
Similarly, the central bank sees no inflation risks in the current rise of real wages, but will watch the trend, the chairwoman said.
She also said that food price inflation is likely to remain more volatile than other types of inflation.
The central bank said that food inflation is likely to decelerate in April-June and then rise in July-September.
Gasoline and diesel fuel may inflate 5.3% and 1.9%, respectively, if the duties are moved to the retail prices, it also said.
The central bank’s medium-term outlook on Russia’s economic development has not changed much although the oil price forecast in the basic scenario has been slightly increased.
The chairwoman added that the oil price forecast was increased to U.S. $61 per barrel in 2018, $55 per barrel in 2019 and $50 per barrel in 2020.
The central bank said that the Urals crude price is expected to fall to $62 per barrel in April-June from $65 per barrel in January-March.
It also said that members of an oil production cut agreement between OPEC and non-OPEC states are likely to exit the deal gradually, but not immediately.
Gross domestic product (GDP) is projected to grow 1.5-2% annually in 2018-2020 that is in line with the country’s economic potential.
“Economic activity has resumed its growth at the beginning of 2018 after a decline due to temporary factors at the end of 2017. Annual industrial output metrics returned to a positive territory in January-February. Investment activity advances as well,” the central bank said.
It added that growth of real wages and expansion of consumer crediting support consumer demand recovery.
Nabiullina said that the central bank increased its capital outflow forecast for 2018 to $19 billion from $16 billion.
The central bank also said it increased its capital outflow forecast for 2019 to $15 billion from the previous $6 billion and reduced the forecast for 2020 to $7 billion from $9 billion.
The 2017 capital outflow estimate has grown to $35 billion from $31.3 billion.
The chairwoman said that Russia’s foreign currency and gold reserves may reach $500 billion with no special currency purchases, but thanks to the budget rule policy only.
The central bank said that the reserves may advance by $50 billion in 2018, by $31 billion in 2019 and by $24 billion in 2020.
She also said that the central bank is preparing proposals to fulfill the goals set by President Vladimir Putin during his address to parliament. The government’s mission is to create a basis for “long money” in Russia, and the pension savings system must be developed to this end.
The central bank does no plan to launch any special refinancing facilities for these tasks, she said.
The central bank said that savings ratio of Russians will become stable in the future and that budget spending may rise to fulfill the goals set by Putin after the new government is formed.
The chairwoman also said that trade restriction measures planned by the U.S. have very limited direct influence on Russia, but global risks of protectionism only grow.
The next meeting of the regulator’s board of directors was slated for April 27.