At the regular meeting of the Board of Directors of the Central Bank of Russia held on March 24, 2017, a decision was taken to reduce the key interest rate by 0.25 p.p. to 9.75%.
The last time the Central Bank reduced the rate was in September 2016 when it fell from 10.5% to 10%.
According to the regulator, further reduction of the interest rate can be driven by slowdown of the rate of inflation. Note that growth rates of consumer prices kept falling from summer 2016. According to the results of July 2016, Rosstat registered the inflation rate of 7.2% (a year-on-year growth in prices), while in February 2017 the index stood at 4.6%, which is close to the target level. Note that in October 2016 the Central Bank of Russia forecasted that it would be feasible to reduce the inflation rate to 4.5% only by October 2017. So, the Central Bank could reduce the key interest rate because the actual inflation rate was falling at advanced rates.
According to the Central Bank, such a symbolic reduction of the key interest rate can be explained by the fact that inflationary shocks are still likely. The regulator made a decision based on the macroeconomic forecast under which the price of oil would amount to $40 a barrel by the end of 2017. As at present the Brent oil price exceeds $50 a barrel, it is clear that the Central Bank fears that oil prices may fall and that will inevitably lead to depreciation of the national currency and a higher inflationary pressure.
Another source of risks is associated with the US Federal Reserve’s policy. The US monetary authorities gradually increase interest rates to stimulate the capital outflow from developing markets, including Russia and it cannot, but affect the rouble’s exchange rate. Though inflationary expectations are diminishing, they have failed to consolidate at a desirable level yet, so the Central Bank cannot ease much its monetary policy. Due to risks related to a renewal of growth in inflationary expectations, the monetary authorities cannot act more resolutely to reduce the key interest rate.
With the current trends of gradual recovery of business activities and slowdown of the inflation rate prevailing, the regulator is expected to ease further its monetary policy, but the key interest rate reduction is definitely going to be a smooth one.
Yevgeny Goryunov, Researcher of the International Budget Stability Department