UPDATE: Russian cbank keeps key rate at 10.5% amid inflation risks

(Adds comment of Economic Development Minister, ministry’s representative in last four paragraphs)

MOSCOW/VELIKY NOVGOROD, Jul 29 (PRIME) -- The board of directors of the Russian central bank kept the key rate at 10.5% annually at a meeting on Friday, because inflation risks remain, the regulator said in a statement.

Risks that inflation will not fall to the target level of 4% in 2017 remain due to high inflation expectations, uncertainty concerning consolidation of the budget, including a further rise of salaries and pensions. The current growth of salaries and wages may depress households’ propensity to save, the statement said.

The central bank must keep the key rate at a level, which stimulates propensity to save, reduces inflation expectations and slows down inflation, but it will also consider cutting the key rate in the future.

On the one hand, Russia’s inflation is slowing due to stability on the financial market, weak consumer demand and a rise in regulated prices in accordance will plans. The central bank estimates consumer price inflation at 7.2% as of Monday. On the other hand, core inflation, as well as seasonally adjusted monthly inflation and inflation expectations are not falling any more.

The regulator expects that annual inflation will decrease below 5% in July 2017 and fall to 4% at the end of 2017 if a moderately tight monetary policy is maintained.

Real interest rates will remain at the level stimulating both demand for loans, propensity to save, and curbing inflation. The regulator will absorb liquidity to reach liquidity surplus in the banking sector.

Production growth in the country is not triggering consumer price inflation because of weak demand; import substitution and exports of manufactured products are rising further, although production and investment are falling in some industries.

The Russian economy may see quarterly growth in July–December and Gross Domestic Product (GDP) is likely to rise on the year in 2017.

The central bank will hold the next meeting to consider the key rate on September 16 and publish its decision at 1:30 p.m. Moscow time. In June, the regulator decreased the key rate by 0.5 percentage points.

Economic Development Minister Alexei Ulyukayev said the central bank may cut the key rate below 10% by the end of 2016. “Of course. By the end of the year – I believe that it actually could happen,” he said. The minister also expects that inflation will fall below 5% by July 2017.

A representative of the ministry told PRIME that if inflation falls to 4% in 2017, the Russian economy may fall further.

“According to a baseline scenario, inflation will stand at 4.9% in 2017. At the same time, according to a target scenario, inflation must be reduced to 4% in 2017. Such a significant decrease in inflation is possible on the back of a further fall of consumer demand that will lead to a further fall of GDP,” the person said.

The ministry believes that inflation risks are connected with uncertainty concerning oil prices, the ruble exchange rate and financing of budget expenses.

End