The RF Central Bank Has Reduced the Key Rate to 10.5%

On 10 June, for the first time since summer 2015 the Central Bank of Russia approved reduction of the key rate. It fell 0.5 p.p. to 10.5%.

So, further reduction of inflationary expectations, slowdown of the rate of inflation and stabilization of external conditions with appreciation of the ruble permitted the Central Bank of Russia to smooth the monetary policy. It is to be noted that the long-awaited reduction of the key rate took place amid prevalence of high uncertainties both in domestic and external conditions – which may have a serious impact on the future course of the monetary policy – of functioning of the Russian economy.

In particular, inflationary expectations are still high: in April 2016 the median value of the expected rate of inflation for the year fell by the mere 0.1 p.p. and amounted to 14.6%. At the same time, slowdown of economic activities virtually stopped and that factor created prerequisites for recovery of growth in aggregate demand by putting upward pressure on prices. In addition to the above, the budget deficit remains high; the government actively spends the reserve fund, while the Central Bank of Russia is left with less sterilization options as banks’ debts to it decrease.
External risks are high, too. The Federal Reserve will start sooner or later tightening of the monetary policy which inevitably results in the outflow of capital fr om emerging markets, depreciation of prices on primary commodities and, consequently, higher pressure on the ruble. The economic situation in China is of great concern: economic growth keeps slowing down which factor creates a threat to economic stability in the Russian Federation, too. Finally, the balance between demand and supply on the oil market is not found yet, and Russia may find itself again in a situation wh ere trade conditions get worse dramatically.

So, on the one side, reduction by the RF Central Bank of the key rate is quite justified in terms of the current dynamics of the rate of inflation and inflationary expectations, while, on the other side, taking into account multiple risks and uncertainties about Russia’s future economic situation the RF Central Bank’s decision can hardly be called overdue or too cautious.

Pavel Trunin, Leading Researcher of the Center for Central Banks’ Policies Research, RANEPA