The Bank of Russia, which has cut rates six times since May 2019 by a total of 175 basis points, added the spread of the coronavirus - which had led to restrictions in international trade and travel, and a rapid deterioration of commodity and financial markets - may lead to a downturn in already-moderate economic activity in coming quarters.
And while the growth path will depend on the scale of the fallout from the spread of the virus, Covid-19, and the actions taken to counter it, the central bank said the economy will be supported by measures taken by itself and the government.
So far Russia has reported relatively few infections and only one death from the coronavirus, but on the government on Monday announced a $4 billion package of measures to help businesses that are facing lower demand, and has banned foreigners from entering the country, shut its land borders with neighboring countries, closed schools, and restricted outdoor and indoor gatherings.
In addition, domestic demand is to receive a boost from additional social policy measures announced in January along with national projects that are being implemented.
Russia's ruble plunged 26 percent from Jan. 12 to March 18, hit by the collapse in oil prices from the dispute with Saudi Arabia and the flight to the safe-haven U.S. dollar amid the fallout from the spread of the coronavirus worldwide.
In recent days the ruble has bounced back slightly though it fell in response today to trade at 79.6 to the U.S. dollar, down 23 percent since Jan. 12 and 22 percent this year.
Russia's inflation rate eased to 2.3 percent in February from 2.4 percent in January but the central bank said it may temporarily exceed its 4.0 percent target due to the weaker ruble.
This rise in consumer prices may also trigger a temporary rise in inflation expectations but slowing domestic and external demand will be a "significant disinflationary factor," and inflation should return to 4 percent in 2021.
Russia's economy has been slowly recovering since a deep recession in 2015 and 2016 and in February the central bank forecast growth this year of 1.5 to 2.5 percent, up from 1.3 percent in 2019, helped by infrastructure projects.
The Bank of Russia issued the following press release:
"On 20 March 2020, the Bank of Russia Board of Directors decided to keep the key rate at 6.00% per annum. In February — March, the situation has been developing with a significant deviation from the Bank of Russia’s forecast under the baseline scenario. This is related to changes in external conditions: the spread of the coronavirus epidemic and a sharp drop in oil prices. The ruble’s depreciation is a temporary proinflationary factor. It might prompt annual inflation to exceed the target level this year. However, the dynamics of domestic and external demand will exert a meaningful constraining influence on inflation on the back of a pronounced slowdown of global economic growth and increased uncertainty. The package of measures adopted by the Government and the Bank of Russia ensures financial stability and will support the economy. All these factors were taken into account when making the key rate decision. Given the current monetary policy stance, annual inflation will return to 4% in 2021.
Moving forward, 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. In 2020, inflation may temporarily exceed the target level. It is expected to return to 4% in 2021.
The temporary acceleration of annual inflation in the coming months will be caused by the weakening of the ruble in February — March, which is related to changes in external conditions: a worsening situation in global financial markets in the face of a threat of a global recession on the back of the coronavirus epidemic and a sharp drop in oil prices. The observed weakening of the ruble and the consecutive acceleration of consumer price growth rates may cause a temporary rise in inflation expectations of households and businesses.
However, slowing growth in both domestic and external demand is a significant disinflationary factor. It will have a constraining effect on inflation. In this context, given the current monetary policy stance, annual inflation will return to 4% in 2021.
Monetary conditions have tightened under the influence of negative external factors. The worsening situation in the global economy and a sharp drop in oil prices have prompted growth in risk premiums on a wide range of financial assets, including in emerging market economies. In this context, OFZ and corporate bond yields have increased, certain banks have started to raise their loan and deposit interest rates. The Bank of Russia’s measures taken to curb financial stability risks and regulatory relaxations adopted will support credit expansion, including in the most vulnerable sectors, and will help limit the scale of tightening of monetary conditions.
Economic activity. In February — March, the situation has been developing with a significant deviation from the Bank of Russia’s forecast under the baseline scenario. This is related to worsening global growth prospects amid the spreading coronavirus and restrictions on cross-border cargo and passenger traffic, as well as to a rapid deterioration of dynamics in global commodity and financial markets. These factors may cause the moderate growth of the Russian economy in the beginning of the year to change to a downturn of the economic activity in the coming quarters.
The Russian economy’s growth path will in many ways depend on the scale of the fallout from the further spread of the coronavirus and the action to counter it, alongside with the impact of this action on production, demand and business and consumer sentiment. The Russian economy will gain support from the package of the Government and the Bank of Russia’s economic measures to counter the consequences of the coronavirus pandemic and financial market volatility. Domestic demand is set to receive a boost this year from additional social policy measures announced in January, as well as the national projects being implemented as scheduled.
Inflation risks. There has been a rise in short-term proinflationary risks, driven by a potentially more pronounced pass-through of the ruble weakening into prices, coupled with the impact of the temporary increase in current demand for a number of products and services, triggered by consumers’ drive to accumulate stocks. However, a strong weakening of external demand, a potential decline in consumer activity and lag effects of the tightened monetary conditions may emerge as a source of significant disinflationary risks over a medium-term horizon.
Moving forward, 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 parallel with its key rate decision, the Bank of Russia took a number of measures towards ensuring financial stability, supporting the economy and the financial sector amid the coronavirus pandemic. These measures are intended to, among other things, maintain access of small and medium enterprises to bank lending, shore up mortgage lending and protect the interests of people affected by the spreading pandemic. In a similar vein, there are plans to take action to relax administrative burden for the financial sector, with a view to supporting the sector’s lending capabilities.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 24 April 2020. The press release on the Bank of Russia Board decision and the medium-term forecast are to be published at 13:30 Moscow time."
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