UPDATE: Cbank says keeps key rate at 10% as CPI falls on temporary factors

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MOSCOW, Feb 3 (PRIME) -- The Russian central bank has kept the key rate at 10% annually because while inflation is decelerating in accordance with the forecast and inflation expectations are gradually fading, this is partially conditioned by temporary factors, it said in a statement on Friday.

Potential for further reduction of the key rate in January–June has diminished due to a change in the external and internal conditions, it said.

The consumer price index (CPI) decreased to 5.1% as of Monday from 5.4% at the end of 2016. Low domestic demand, with households sticking to a savings-focused model, has suppressed inflation. But the deceleration was partially conditioned by temporary factors, such as the ruble rate dynamics and a good harvest in 2016.

The central bank has retained its 4% inflation target for 2017. Inertia of inflation expectations and an abating household tendency to save incomes can put barriers to inflation decrease. The foreign economic and political uncertainty remains high, which can hurt the ruble and inflation expectations.

“The retention of moderately severe monetary and credit conditions is necessary to underpin the tendency to save and to consolidate the tendency of a sustainable inflation deceleration influenced by a restricted demand,” the authority said. This decision will also limit short-term risks of inflation, when Finance Ministry starts buying foreign currency from the market.

The influence of the Finance Ministry’s interventions on the banking interest rates will be close to neutral.

Economic activity is restoring somewhat faster than the central bank forecast in 2016 and the positive dynamics will persist in January–March on the back of industrial output growth and investment activity recovery. The authority expects the gross domestic product to rise slightly in 2017.

Expansion of the consumer activity due to a real wage increase is not expected to create inflation pressure because of an increasing offer of goods and services.

After the statement release, the ruble grew 7 kopecks against the U.S. dollar to 59.36 and the 17 kopecks against the euro to 63.78 as of 1:41 p.m., Moscow time.

An official of the Economic Development Ministry said, “This has been an unsurprising decision which will allow inflation to reach 4% at the end of 2017. It is important to reduce inflationary expectations so that economic subjects believe that this figure is for real and for a long time.”

He said that structural changes in the economy needed to accelerate growth will be envisaged in the 2017–2025 all-encompassing plan.

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