The Bank of Russia has cut the key rate by 1 p.p.

On 15 June 2015, the Bank of Russia Board of Directors took a pending decision to reduce the key rate by 1 p.p. from 12.50 to 11.50 percent per annum.

According to the regulator, the decision was reached taking account of lower inflation risks and persistent risks of considerable economy cooling.

To recap, from the outset of the year, the RF CB reduced the key rate on several occasions, each time noting that as long as inflation risks decline, monetary policy will continue easing. This time, according to the official release: “the potential of monetary policy easing will be limited by inflation risks in the next few months,” which can be construed as unwillingness of the regulator to go to further key rate reduction on the back of an obvious slowdown of the inflationary processes.

As of the start of June, inflation stands at 15.6% per annum and the exchange rate pass through effect has been generally exhausted, remaining macroeconomic factors (contraction of aggregate demand, seasonal slowdown of the inflation and relatively tough monetary policy of the RF CB) keep prices down, and the fall of inflation seems natural. At the same time, according to the Bank of Russia economic agents’ inflation expectations decrease slowly so far. Moreover, economic agents do not expect a stable nominal ruble rate. As long as the current monetary policy is mainly focused on the economic agents’ expectations, dynamics of expectations in RF will hamper monetary policy easing in the future, although potential for some further key rate reduction remains so far.

To note, the monetary authorities’ policy cannot be called exceptionally tough now. Taking account of current inflation level, the key rate in real terms is negative, and real rates of money market are also close to this level. This reflects the wish of the Bank of Russia to provide certain support to economy which is in recession preserving deterrent effect on price growth.

Evgeny Goryunov – researcher