It is Bank of Russia's first rate cut this year but the sixth since it began the current easing cycle in May 2019. Since then the rate has been lowered by a total of 175 basis points.
"Risks of a substantial global economic slowdown persist" and "deflationary risks still exceed pro-inflationary risks over the short-term horizon," the central bank said, adding:
"If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings."
Russia's inflation rate fell to 2.4 percent in January from 3.0 percent in December, the 10th consecutive month of decelerating inflation and the lowest rate since June 2018.
The decline was partly affected by last year's hike in value-added-tax dropping out of the comparison and moderate price growth, the central bank said, forecasting annual inflation in 2020 of 3.5 to 4.0 percent and then 4.0 percent in 2021 and 2022, in line with its target.
The rise in Russia's ruble along with slower inflation among Russia's trading partners is limiting import price inflation and the Bank of Russia expects inflation expectations to continue to decline.
Russia's ruble has been firming since September 2018 but has dropped since mid-January and fell a further 1.0 percent in response to the rate cut.
The ruble was trading at 63.99 to the U.S. dollar today, down 3.1 percent this year.
Russia's economy is continuing to improve after a deep recession in 2015 and 2016, with growth in 2019 estimated at 1.3 percent, at the upper bound of the central bank's forecast, despite a decline in exports.
"Economic activity continues to be constrained by weakening external demand for Russian exports on the back of a global economic slowdown," the central bank said, with leading indicators pointing to weak business sentiment in the industrial sector, which is mainly geared to exports.
The central bank kept its growth forecasts unchanged, expecting gross domestic product is expected to grow 1.5 to 2.5 percent this year and then 2.0 to 3.0 percent in 2022, helped by infrastructure projects.
Russia's central bank embarked on a monetary easing cycle in January 2015 as it rolled back a sharp 750-basis-point rate hike in December 2014 that was aimed at protecting the ruble, which plunged in the wake of the country's conflict with Ukraine.
From January 2015 to April 2018 the key interest rate was cut by a total of 9.75 percentage points as the ruble slowly recovered and inflation eased. But the easing cycle came to a halt after fresh U.S. sanctions were imposed over Russia's meddling in the 2016 presidential election led to a 10 percent fall in the ruble and a 9 percent fall in the Moscow stock market.
In September and December 2018 the central bank raised its rate twice by a total of 50 basis points to curb inflation from a combination of higher import prices from the lower ruble and a rise in VAT to 20 percent on Jan. 1, 2019.
The Bank of Russia released the following press release:
"On 7 February 2020, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 6.00% per annum. Inflation slowdown is overshooting the forecast. Households’ inflation expectations and price expectations of businesses remain stable overall. In 2019 H2, the growth rate of the Russian economy picked up. Risks of a substantial global economic slowdown persist. Disinflationary risks still exceed pro-inflationary risks over the short-term horizon. In this context, given the monetary policy stance, annual inflation will come in at 3.5–4.0% in 2020 and will remain close to 4% further on.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
Inflation dynamics. Inflation slowdown is overshooting the forecast. The annual consumer price growth rate declined to 2.4% in January (from 3.0% in December 2019) as a result of both factoring out the effect of the VAT rate hike and moderate price growth in January. January results show that annual core inflation decreased to 2.7% as compared to 3.1% in December. According to the Bank of Russia’s estimates, inflation indicators reflecting the most sustainable price movements are close to or below 3%.
In January, disinflationary factors continued to exert considerable influence on inflation. Annual growth in prices of food products and non-food goods continued to decline. Expanded supply in individual food market segments helps maintain low monthly (seasonally adjusted) and annual growth rates of food prices. The 2019 ruble appreciation alongside with inflation slowdown in Russia’s trading partners limits growth of import prices. Subdued demand continues to influence inflation, including external demand.
In January, households’ inflation expectations somewhat abated, while remaining elevated. Business price expectations remain stable. Annual inflation slowdown paves the way for a future decline in inflation expectations of households and businesses.
In accordance with the Bank of Russia forecast, given the monetary policy stance, annual inflation will come in at 3.5–4.0% in 2020 and will remain close to 4% further on.
Monetary conditions. Monetary conditions have continued to ease. OFZ yields and deposit and lending rates continued to decline. The Bank of Russia’s decisions to cut the key rate and the decline in OFZ yields create conditions for a further reduction in deposit and lending rates; this will support the expansion of corporate and mortgage lending. At the same time, consumer lending gradually slows down, which is to a large extent driven by the tightening of non-price conditions under the influence of the Bank of Russia’s macroprudential measures.
The Bank of Russia will assess the effect of the adopted key rate decisions on monetary conditions and inflation movements.
Economic activity. Rosstat’s flash estimate shows that 2019 GDP growth totalled 1.3%, which corresponds to the upper bound of the Bank of Russia’s forecast of 0.8–1.3%. The dynamics of final consumption expenditure made a major contribution to GDP growth in 2019. The decline in export quantities in turn exerted considerable negative influence on GDP dynamics.
In Q4, economic activity indicators mainly continued to improve. At end—2019, investment activity was supported by an accelerated increase in capital budget expenditure, including owing to the implementation of national projects. Annual retail trade turnover and industrial production continued to grow. However, leading indicators point to a still weak business sentiment in industrial sector, which is mostly specific of export orders. Economic activity continues to be constrained by weakening external demand for Russian exports on the back of a global economic slowdown.
The labour market creates no additional inflationary pressure. The fact that unemployment remains near historic lows is not driven by expanding labour demand but rather by a simultaneously contracting number of employees and the labour force.
The Bank of Russia has left the 2020–2022 GDP growth forecast unchanged. The GDP growth rate will gradually increase from 1.5–2.0% in 2020 to 2–3% in 2022. This will be possible should the Government’s measures for overcoming structural constraints, including the implementation of national projects, be realised. However, reduced global economic growth expected over the forecast horizon will continue to exert a constraining impact on growth of the Russian economy.
Inflation risks. Disinflationary risks still exceed pro-inflationary risks over the short-term horizon. This is primarily related to the state of domestic and external demand. Disinflationary risks associated with movements in the prices of certain food products persist, including on the back of a rising supply. The 2019 ruble appreciation may continue to influence price growth. The reaction of both consumer and investment demand of the private sector to the easing of monetary conditions and accommodative fiscal measures may be limited by the moderate sentiment of consumers and businesses.
Meanwhile, pro-inflationary factors should be taken into consideration. Risks that food market trends may reverse cannot be ruled out, given that the ratio of temporary and permanent factors for this market is hard to estimate. At the same time, the monetary policy easing that has already been undertaken may have a stronger upward effect on inflation than the Bank of Russia estimates.
Risks associated with trade disputes have somewhat abated. Nonetheless, the risk of a further slowdown in global economic growth persists, including under the influence of geopolitical factors, intensified volatility in global commodity and financial markets, which may affect the exchange rate and inflation expectations. The coronavirus situation will be an additional uncertainty factor over next quarters.
According to Bank of Russia estimates, the implementation of additional social measures announced in January will not have a considerable pro-inflationary impact. At the same time in 2020, inflation dynamics will be shaped by the schedule of budget expenditure.
A number of internal conditions continue to pose pro-inflationary risks over a longer-term horizon. Significant risks are posed by elevated and unanchored inflation expectations. The mid-term inflation dynamics may also be affected by fiscal policy parameters, including decisions on the investment of the liquid part of the National Wealth Fund in excess of the threshold level set at 7% of GDP.
The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements and possible changes in consumer behaviour. These risks remain moderate.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
In the follow-up to the Board of Directors meeting of 7 February 2020 the Bank of Russia released its medium-term forecast.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 20 March 2020. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time."
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