The Bank of Russia raised its rate twice last year in pre-emptive moves to limit inflation and today's decision was largely expected following recent statements by Governor Elvira Nabiullina in March and on April 13.
Today the central bank said the rate hikes in September and December, which followed rate cuts in February and March, "were sufficient to curb the effects of one-off pro inflationary factors" and confirmed its forecast for inflation to return to 4.0 percent in the first half of 2020.
Following the March meeting of the bank's board of directors, Nabiullina said she had every reason to believe last year's rate hikes were likely to bring inflation back to near the bank's target in the first half of 2020.
Her confidence in the path of inflation was supported by the bank's lowering of its forecast for inflation to reach 4.7-5.2 percent by the end of this year from a previous forecast of 5.0-5.5 percent.
Earlier this month in Washington D.C., Nabiullina then said she saw the probability of a rate cut this year and the rise in the rouble was helping curb price rises.
Last year's rate hikes came in response to higher import prices from a fall in the ruble, higher food prices, and a rise in consumer prices ahead of an increase in value added tax to 20 percent from 18 percent at the start of this year.
As a consequence, Russia's inflation rate accelerated in the second half of 2018 from a year-low of 2.3 percent in May and rose steadily through March this year when it hit 5.3 percent.
But the central bank said inflation had now passed the peak and decelerated to 5.1 percent as of April 22, slightly below its forecast, and the pass-through of the VAT hike to prices had largely materialized while consumer demand was still constraining inflation.
In addition, the rise in the rouble since the start of this year and declining prices for motor fuel and certain food products would temporarily slow down consumer price growth, the bank said.
Last year the rouble fell in response to fresh sanctions by the U.S. April but began to bounce back in September following the central bank's first rate hike. This year the ruble has continued to gain strength and has risen 7.7 percent so far to trade at 64.65 against the U.S. dollar today.
Inflation expectations by households rose slightly after falling in March while expectations among businesses have continued to decline but remain at an elevated level, the bank added.
Economic activity in Russia remains close to its potential but the hike in VAT slowed retail sales and business activity in the first quarter of this year and there is no upward pressure on prices from consumer demand and labour markets, the bank said, adding industrial production grew moderately but below the fourth quarter of last year.
In the fourth quarter of last year Russia's gross domestic product grew 2.7 percent year-on-year and the central bank confirmed its forecast for 2019 growth of 1.2 to 1.7 percent.
In 2018 Russia's economy grew 2.3 percent but this was above forecasts by both the central bank and the economy ministry and followed an sharp upward revision of construction growth in the first 11 months of the year by Rosstat, the federal statistics service.
The next monetary policy meeting by the bank's board is scheduled for June 14.
The Bank of Russia issued the following statement:
"On 26 April 2019, the Bank of Russia Board of Directors decided to keep the key rate at 7.75% per annum. Annual inflation passed the local peak in March and started to subside in April. Consumer prices current growth rates track somewhat below the Bank of Russia forecast. In April, inflation expectations of households rose slightly after a tangible drop in March. Business price expectations continued to decline but remain at an elevated level. Short-term proinflationary risks have abated. The Bank of Russia’s decisions to raise the key rate made in September and December 2018 were sufficient to curb the effects of one-off proinflationary factors. According to the Bank of Russia’s forecast, annual inflation will return to 4% in the first half of 2020.
In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in Q2-Q3 2019.
Inflation dynamics. In March, annual inflation passed the local peak. The annual consumer price growth rate increased to 5.3% in March (from 5.2% in February 2019). In April, annual inflation started to slow down and declined to 5.1%, according to the estimate as of 22 April. Consumer prices current growth rates tend to be somewhat below the Bank of Russia’s forecast. The VAT increase pass-through to prices has largely materialised.
The Bank of Russia’s pre-emptive key rate hikes in September and December 2018 helped return annualised monthly consumer price growth rates to levels close to 4%. Consumer demand trends constrain inflation. Also, temporary disinflationary factors contributed to slowing consumer price growth, among those ruble appreciation since the beginning of the year, and declining prices for principal types of motor fuel and certain food products in March-April compared to February readings.
In April, inflation expectations of households rose slightly after a tangible drop in March. Business price expectations continued to decline but remain at an elevated level.
According to the Bank of Russia’s forecast, annual inflation will return to 4% in the first half of 2020.
Monetary conditions. Monetary conditions have seen no significant changes since the last Board meeting. OFZ yields, as well as deposit and lending rates held close to their March-end readings. That said, the year-to-date decline in OFZ yields creates conditions for the decline of deposit and lending rates in the future.
Economic activity. Rosstat’s revision of 2014-2018 GDP data has not changed the Bank of Russia’s view of the current state of the economy — it is close to the potential. Current consumer demand trends and labour market conditions create no excessive inflationary pressure. In the first quarter, industrial production grew moderately year on year and somewhat below the reading of 2018 Q4. Investment activity remains muted. Annual retail sales growth declined in the first quarter as a result of the VAT increase and the slowdown in wage growth.
The Bank of Russia expects GDP to grow by 1.2-1.7% in 2019. The VAT hike slightly constrained business activity. The incremental budget revenues will be used to raise government spending, including investment, as early as 2019. Subsequent years might see higher economic growth rates as national projects are implemented.
Inflation risks. Short-term proinflationary risks have abated. With respect to internal conditions, the secondary effects of the VAT increase are seen as immaterial and accelerated price growth in certain food products became less of a risk.
That said, significant risks are posed by elevated and unanchored inflation expectations, as well as by external factors. In particular, the risk of a slowdown in global economic growth still looms. Geopolitical factors might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations. Supply-side factors in the oil market may amplify the volatility of global oil prices. At the same time, the revision of the interest rate paths by the US Fed and other central banks in advanced economies in the first quarter constrains the risks of persistent capital outflows from emerging markets.
The Bank of Russia leaves mostly unchanged its assessment of risks associated with wage movements, possible changes in consumer behaviour and budget expenditures. These risks remain moderate.
In its key rate decision-making, the Bank of Russia will take into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of turning to cutting the key rate in Q2-Q3 2019.
The Bank of Russia Board of Directors will hold its next rate review meeting on 14 June 2019. The Board decision press release and the medium-term forecast are to be published at 13:30 Moscow time."
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