Russia holds rate, wants lower inflation expectations

     Russia's central bank maintained its key policy rate at 5.50 percent, as expected, saying it expects inflation to decline in the first half of next year but a "downward trend in inflation expectations needs to be formed to ensure a way of achieving an inflation target in the medium term."
    The Bank of Russia, which introduced it new "key" benchmark rate in September to replace the refinancing rate, said the factors behind the recent rise in inflation were considered transitory and inflation should reach the bank's target in the second half of 2014 as the "the expected sluggish recovery of external demand and the subdued investment activity will constrain inflation dynamics."
    Russia's headline inflation rate was estimated at 6.5 percent as of Dec. 9 from 6.5 percent in November and 6.3 percent in October, exceeding the bank's 5-6 percent inflation target for 2013.
    The central bank, which is formally moving to an inflation-targeting regime, in September raised its formal inflation target for 2014 to 5.0 percent from 4.5 percent, reflecting the government's decision to raise utility rates. The inflation target for 2015 is 4.5 percent and 4.0 percent for 2016.

    As in November, the central bank said the rise in inflation was due to higher prices for fruits and vegetables and some animal products - "unusual for this season - while non-food prices were constrained by "the absence of significant demand-side inflationary pressure in the context of gross output slightly below its potential."

     Russia's Gross Domestic Product contracted by 0.26 in the second quarter from the first quarter for annual growth of 1.2 percent, the same rate as in the first quarter.
    The bank said the pace of economic growth remained low, with consumer demand the major driver as production and investment demand remains subdued.
    "The Bank of Russia will take into account the inflation targets and the inflation forecast, as well as economic growth prospects when making monetary policy decisions," the bank said, reflecting a neutral policy stance.
    In September the central bank adopted the 5.50 percent rate on its one-week repo and deposit auctions as its main policy rate, with the refinancing rate gradually phased to the level of the key rate by 2016. The refinancing rate has been steady since September 2012 when it was raised by 25 basis points.

    www.CentralBankNews.info