UPDATE: Russian central bank lowers key rate to 10% from 10.5%

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MOSCOW, Sep 16 (PRIME) -- The board of directors of Russia’s central bank has lowered the key rate by 0.5 percentage points to 10% in the light of slowing inflation and lower inflationary expectations amid unstable economic activity, the regulator said on Friday.

INFLATION

The annual pace of consumer price growth fell to 6.6% as of Monday after 7.2% in July, but lower inflation was caused by the ruble rate dynamics amid more favorable foreign conditions than it was expected earlier, the central bank said.

The central bank expects that annual inflation will amount to around 4.5% in September 2017 and will reach the target of 4% by the end of 2017.

“Taking into account the decision made and the remaining moderately tight monetary policy annual growth of consumer prices will amount to around 4.5% in September 2017 and will further decrease to the target level of 4% at the end of 2017,” the regulator said.

However, risks that inflation will not reach the target of 4% in 2017 still remain, the regulator said.

The central bank’s Chairwoman Elvira Nabiullina said that the regulator has narrowed its forecast for Russia’s inflation in 2016 to 5.5–6% from 5–6%.

Russia’s inflation may fall, but there are risks of it “being stuck” at 5–6% for a long time, and the regulator will not reach its inflation target, she said. “We are sure that we will be able to cut inflation to the target level even if inflationary risks come true. But I would like to point out that our goal is not to reach a one-time result, but to reach consistent inflation dynamics.”

KEY RATE DYNAMICS

The regulator believes it is necessary to keep the rate at 10% until the end of the year, with reduction possible in the first or second quarters of 2017. The decision to reduce the key rate can also lower inflationary expectations, it said.

The central bank will estimate inflationary risks, and economic dynamics and inflation matching the basic forecast while making decisions on the key rate over the next few months, it said. The next meeting on the key rate is scheduled for October 28.

Nabiullina said it is very unlikely that the regulator will cut its key rate to below 10% in 2016 under a baseline scenario. “Sure, such a possibility exists, but it will happen only if there are significant improvements in the situation compared with our baseline scenario.”

The central bank may return to the practice of cutting the key rate by 0.25 percentage points, she added. “If there is a next cut, it will not be a double-digit figure, and a step of 0.25 (percentage points) is possible there,” she said.

RUSSIAN ECONOMY

Russia’s gross domestic product (GDP) may return to quarterly growth already in the second half of 2016, but will grow less than 1% in 2017, the central bank also said, adding this forecast was based on the annual average oil price of U.S. $40 per barrel.

Nabiullina said the central bank kept its forecast for Russia’s GDP contraction in 2016 at 0.3–0.7%. The Russian economy will grow about 1.5–2% in 2018–2019, she said.

It is too early to speak about the Russian economy switching to consistent growth, she added. “Dynamics of the economic indicators are very inconsistent and it is early to speak about a transition to stable growth dynamics,” she said adding that the economy restoration varies from sector to sector and from region to region.

There are also no reasons for a plunge of the ruble’s exchange rate or for an increase of its volatility, she also said.

OIL PRICE, FORECASTS

The central bank’s forecast for the next three year envisages the annual average oil price of $40 per barrel, Nabiullina said. “We see no positive momentum provided by external conditions in our baseline forecast, so we maintain our calculations of the annual average oil price of $40 per barrel for the whole three-year period, and we also assume slow growth of the global economy.”

Russia’s current account balance will not be hurt even if the oil price slumps to $25 per barrel, which is envisaged by the regulator’s risk scenario. The bank expects the current account surplus to fall if the oil price is $40, which “correlates to a decrease of net private capital outflow under the floating ruble’s exchange rate,” she said.

The regulator expects Russia’s net private capital outflow in 2016–2018 at no more than $25 billion per year, she said.

The central bank bases its forecast on an assumption that Anti-Russian sanctions will remain until the end of 2019, she also said. “There will be no pressure on the ruble’s rate, on inflation, as our current account balance has adapted to sanctions and low oil prices.”

BANKING SECTOR

The Russian banking sector will switch to a structural liquidity surplus in 2017, but it is possible if the government’s spending from the Reserve Fund in 2016 reaches about 2.7 trillion rubles. “If the sum is lower, then we will switch to it later. If the sum is higher, than we will switch earlier,” she said.

Anatoly Aksakov, head of the Association of Regional Banks, told PRIME that Russian banks will decrease loan interest rates by 1–1.5 percentage points within one to two months following the central bank’s key rate cut.

A representative of Russia’s second largest bank VTB Bank said the bank also plans to cut interest rates for corporate clients following the central bank’s decision.

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