Alexey Vedev, Senior Researcher at the Financial Sector Department of the Gaidar Institute, spoke to “Vyberu.ru” about the prospects for the Bank of Russia’s decision on the key rate in September.
Dr. Vedev believes that the Central Bank of Russia will most likely continue to ease monetary policy. At the same time, he argues that the August decline in prices should not be interpreted as a sustained sign of slowing inflation: it is largely due to seasonal price drops for fruits and vegetables.
“Deflation in August occurs practically every year—it is a purely seasonal decline in prices for fruits and vegetables. So, there is nothing new here. As for the 1.3% GDP growth in Q2, two opposing trends are at play here. On the one hand, consumption picked up, partly due to the previous cut in the key interest rate: deposits became less profitable, so people are withdrawing money, saving less, and spending more. On the other hand, in Q1, the decline in corporate investment in fixed assets—machinery, buildings, technology, production expansion, and repairs—amounted to 14.3%. “I haven’t seen the figures for the second quarter yet, but I think there will be a significant decline there as well,” noted Alexey Vedev.
According to the economist, this situation creates the conditions for a further reduction in the key rate. He considers a reduction from the current 14% to 13.5% to be the optimal option.
“I would lower the rate to 13.5%. I don’t rule out that the Central Bank might leave it unchanged. But it’s likely that it will face some pressure—from public opinion, the business community, and government officials. In that case, it will have to lower the rate after all,” said Alexey Vedev.
That said, he draws attention to inflationary risks this fall. In particular, he believes that increases in utility rates could fuel price growth. Therefore, despite a possible rate cut in September, the rate will likely remain in the 13.5–13.75% range through the end of the year.