The Bank of Russia, which has cut its rate by 600 basis points this year, most recently in July, expects inflation to drop below 7 percent by October next year and then to its target of 4.0 percent in 2017 as "moderately tight monetary conditions and the weak domestic demand will keep putting downward pressure on inflation."
Russia's inflation rate eased slightly to 15.6 percent as of Oct. 26 from 15.7 percent in September but the central bank said inflation expectations remain elevated despite a decline this month.
Russia's inflation rate started accelerating last year in response to a plunge in the exchange rate of the ruble that was hit by tumbling crude oil prices and Western sanctions over Russia's conflict with Ukraine.
Last year the ruble fell 45 percent against the U.S. dollar but then bounced back in the first few months of this year. But the ruble then started falling from late May and was trading at 64.26 to the dollar today, down just over 6 percent this year.
The combination of low global oil prices and western sanctions hit Russia's economy hard, with Gross Domestic Product shrinking in the last four quarters. In the third quarter of this year, the economy contracted by 2.01 percent from the second quarter for an annual decline of 4.3 percent.
The central bank said the economic downturn in September was "somewhat slower," as the labour market was adjusting to the new conditions through a fall in real wages and wider part-time employment that will further limit consumer spending along with low retail lending.
Investment demand is also being constrained by limited potential substitution of external finance with domestic finance due to high corporate debt and the narrow nature of Russia's financial market.
"Going forward, the economic situation will depend on global energy prices and the pace of the economy's adjustment to external shocks," the central bank said.
The Bank of Russia issued the following statement:
"On 30 October 2015, the Bank of Russia Board of Directors decided to keep the key rate at 11.0 percent per annum, in recognition of persistent substantial inflation risks. The balance between inflation risks and the risks of economy cooling has mainly remained unchanged. Given the decision made, the moderately tight monetary conditions and the weak domestic demand will keep putting downward pressure on inflation. The annual pace of consumer price growth in October 2016 is estimated to be under 7% and expected to total 4% in 2017. As inflation slows down in line with the forecast, the Bank of Russia will continue with a downward revision of its key rate, at one of its forthcoming Board of Directors meetings. In making its rate decisions, the Bank of Russia will be guided by changes in the balance between inflation risks and the risks of economy cooling.
Between September and October, annual inflation was slightly down. According to the Bank of Russia’s estimates, annual consumer prices grew at 15.6% as of 26 October, and at 15.8% in August. Inflation expectations, though having decreased as compared with September, remain elevated. The moderately tight monetary policy and the weak domestic demand driven by the low growth of the nominal income of the population, help constrain the growth of consumer prices.
The moderately tight monetary conditions are also exerting downward pressure on prices. Money supply (M2) growth rates remain low. Influenced by the Bank of Russia’s previous key rate reductions, lending and deposit rates remain on a downward trend. These still remain on the level which, on the one hand, serves to keep ruble savings attractive and, on the other hand, given sustaining high debt burden and tight creditworthiness requirements, is a factor behind low annual lending expansion.
September saw a somewhat slower economic downturn, evidenced by key macroeconomic indicators. While structural factors are still curbing economic growth, the current output contraction is also of a cyclical nature. However, the negative demographic trends keep unemployment low, while the labour market is adjusting to the new conditions, largely through a decline in real wages and wider part-time employment. These factors, along with low retail lending, will further contain consumer spending. Fixed capital investment will continue to be weak amid persistent economic uncertainty and relatively tough lending conditions. Investment demand is expected to be constrained by limited potential substitution of external finance with domestic one, following the narrow nature of the Russian financial market and high corporate debt load. Investment is likely to be supported somewhat by the governmental turnaround programme. Weak investment and consumer activity will cause low demand for imports. As a result, net exports will be a positive contributor to the annual output growth. Going forward, the economic situation will depend on the global energy prices and the pace of economy’s adjustment to external shocks.
The slack domestic demand and the moderately tight monetary conditions will drag down annual inflation in 2016-2017. A slowdown in the annual consumer price growth will create prerequisites for decrease in inflation expectations. In early 2016, annual inflation is expected to decline considerably due to, among other factors, its high value in early 2015. The Bank of Russia forecasts the annual consumer price growth to be under 7% in October 2016, on track to reach the 4% target in 2017, facilitated by the current monetary policy. As inflation slows down in line with the forecast, the Bank of Russia Board of Directors will continue with a downward revision of its key rate, at one of its forthcoming meetings.
Key sources of inflation risks include a further worsening of external climate, persistently high inflation expectations and an upward revision, planned for 2016-2017, of rates and prices in the regulated sector, upward revision of social payments indexation, as well as overall budget policy easing.
In making its subsequent decisions, the Bank of Russia will be guided by changes in the balance between inflation risks and the risks of economy cooling.
The Bank of Russia will hold its next rate review meeting on 11 December 2015. The press release on the Bank of Russia Board of Directors’ decision is to be published at 13:30 Moscow time."
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