UPDATE: Chairwoman: Cbank to cut key rate gradually to 6-7% in 1-2 years

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MOSCOW, Nov 16 (PRIME) -- The central bank will gradually reduce the key interest rate to 6-7% in the next one or two years, Chairwoman Elvira Nabiullina said at a meeting at the State Duma, the lower chamber of the country’s parliament, on Thursday.

“There are factors supporting inflation and there is a factor of high inflationary expectations. We will reduce the interest rate gradually. We hope to reach the equilibrium, which is 6-7% under our estimates, in one or two years,” she said.

“The dynamics will allow us to prevent economic growth pressure… A rapid change of the key rate could increase the risk that inflation will accelerate, not stabilize… It can hurt the stability we have reached by now.”

The chairwoman said earlier that the Bank of Russia’s key interest rate may be lowered to 6.5-7% until 2019.

The official also said that the central bank does not see its monetary policy as too tough.

“Of course, we disagree that our monetary policy is excessively tough. We see it as moderately tough… We could say it is too tough if inflation is below the target level for a long time.”

She also said that credit affordability in Russia rises due to lower inflation, not to a lower key rate. According to Nabiullina’s, retail crediting advances rapidly, but is still far from the risk of overheating, while crediting of the producing economy is uneven.

“We expect and banks’ polls show that there will be a gradual rise in crediting of non-financial organizations, too,” she added.

Nabiullina said that the period of the Russian economy’s recovery growth has finished, the growth rate is not high, but is already close to the potentially highest level for the present Russia’s economic structure.

“We project gross domestic product (GDP) to grow 1.8% in 2017. On the one hand, it is an apparently positive fact as the economy has restored faster than most people have expected and than we have expected,” she said.

“On the other hand, it means that the recovery growth period is almost over. Under our assessment, we have offset around 95% of the economic decline since 2015… Actually, we will fully compensate for the recession until the end of this year.”

Igor Dmitriyev, head of the monetary policy department of the central bank, said earlier that the central bank forecasted Russia’s GDP growth rate at 1.5-2% in the medium term and may revise it up.

Nabiullina also said that the central bank projects inflation at 2.5-2.7% in 2017 and expects that it will reach a 4% target in 2018.

“According to the latest data, inflation amounts to 2.6%. The slowdown is linked to both fundamental and temporary factors with the latter being more important,” she said.

The official added that the central bank is concerned with a high volatility of inflation.

“In June, we had inflation at 4.4%, which is about 50% more than now. This is a dramatic fluctuation,” she said.

Nabiullina said that the central bank sees the probability that the oil price will stay above U.S. $40 per barrel in 2018 as high, but still sees a fall to below $40 as a possible scenario.

She also said that the central bank anticipates no serious negative consequences from possible U.S. sanctions against Russian sovereign bonds.

“We do not know what they will decide about OFZ state bonds. From our point of view, no serious negative consequences will appear… We have a significant share of foreigners on the OFZ market, but the share is limited,” she said.

“We will always have demand for the bonds from the local banking sector. It is interested in highly liquid assets.”

The official added that Russia’s financial system is resistant enough to external shocks.

“We believe that the system’s resistance to all negative decisions, which may be made, is higher than it used to be three years ago. Anyway, we have instruments to deal with such shocks.”

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