June 19, 2020
Russia’s central bank cut its policy rate for the third time this year and for the 8th time in the last 12 months, saying the downward pressures on inflation are higher than expected and further rate cuts will be considered in coming policy meetings.
The Bank of Russia cut its key rate by another 100 basis points to 4.50 percent and has now cut it by 175 basis points this year following cuts in February and April.
Since June 2019, when the central bank began to reverse two rate hikes in the second half of 2018, the rate has been cut eight times by 325 points.
Today’s decision was well-telegraphed by Governor Elvira Nabiullina who said on June 5 that a 100 basis-point rate cut was among the options that would be considered as there was significant room for monetary policy easing due to fading inflationary pressure from the measures taken by governments worldwide to curb the spread of the Covid-19 pandemic.
“Disinflationary factors have been more profound that expected due to a longer duration of restrictive measures in Russia and across the world,” the central bank said, adding the effect of short-term pro-inflationary factors have largely been exhausted, inflation expectations have eased and financial stability risks in global markets have declined.
“In these circumstances, there’s a risk that in 2021 inflation might significantly deviate downwards from the 4.0% target,” the bank said, adding its rate cut was aimed at limiting this risk.
Russia’s inflation rate eased to 3.0 percent in May from 3.1 percent in April as the upward pressure on prices from a lower ruble and higher demand for certain goods ahead of quarantines and a disruption to supply chains, begin to fade.
As of June 15, inflation rose back to 3.1 percent, the central bank said, adding inflation in coming months will be contained by the rise in the ruble in May and early June on the back of more stable global financial markets and rising oil prices.
But at the same time, inflation will also rise this year due to the low base effect of 2019.
In April the central bank forecast inflation would average 3.1 to 3.9 percent this year, down from 2019’s 4.5 percent.
The current risks of disinflation are mainly due to the uncertainty over the virus and the scale of measures to fight it, and the impact of these measures on economic activity and how fast the global and Russian economy recover.
“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings,” the bank said.
Russia’s ruble tumbled 25 percent from Jan. 12 to March 19 but since then it has rebounded 17 percent and was trading at 69.3 to the U.S. dollar today, down only 10.5 percent this year.
Some of Russia’s measures to contain the spread of Covid-19 remain in place and together with the considerable drop in external demand this is putting longer-than-expected pressure on economic activity and recent surveys of business reflect cautious sentiment.
“The contraction of GDP in the second quarter could prove more sizable than expected,” the central banks said, confirming its forecast for Russia’s economy to contract 4-6 percent this year as compared with growth of 1.3 percent in 2019.
In the first quarter of this year Russia’s GDP grew an annual 1.6 percent, down from 2.1 percent in the previous quarter.
The Bank of Russia released the following press release:
“On 19 June 2020, the Bank of Russia decided to cut the key rate by 100 bp to 4.50% per annum. Disinflationary factors have been more profound than expected due to a longer duration of restrictive measures in Russia and across the world. The effect of short-term pro-inflationary factors has been largely exhausted. Financial stability risks related to the situation in global financial markets have declined. Household and business inflation expectations have abated. In these circumstances, there is a risk that in 2021 inflation might significantly deviate downwards from the 4% target. The key rate decision taken by the Bank of Russia is aimed at limiting this risk and maintaining inflation close to 4%.
If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity 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 this year and in the first half of 2021 will be largely influenced by a steep decline in domestic and external demand occurred in the second quarter. The disinflationary effect of weak demand has strengthened due to both current and deferred economic effect of restrictions. Household and business inflation expectations have abated after a short-lived growth in March-April.
The influence of the weaker ruble and the episodes of increased demand for certain product groups in March has been exhausted. According to preliminary data as of 15 June, annual consumer price growth rate was around 3.1%. In the coming months, consumer price dynamics will be additionally contained by the strengthening of the ruble observed in May — early June on the back of stabilising global financial markets and growing oil prices. Current monthly annualised inflation will continue to decline. At the same time, annual inflation rate will rise in 2020 owing to the low base effect of 2019.
In the context of prevailing disinflationary factors, there is a risk that in 2021 inflation might significantly deviate downwards from the 4% target. The key rate decision taken by the Bank of Russia is aimed at limiting this risk and maintaining inflation close to 4%.
Monetary conditions slightly eased in May-June after some tightening in March-April. OFZ and corporate bond yields dropped below the levels observed at the beginning of the year, including owing to the current monetary policy stance. The country risk premium went down, largely owing to an improved situation in global financial and commodity markets. Interest rates on deposit and housing mortgage loans decreased. At the same time, increased credit risks in the real sector push interest rates up and lead to a tightening of non-price lending conditions in certain market segments. The Bank of Russia’s decisions to cut the key rate, along with a notable drop in OFZ yields, pave the way for reduction in interest rates in other financial market segments in the future. Coupled with the Government and other Bank of Russia’s measures, this will support lending, including in the most vulnerable sectors of the economy.
Economic activity. Some of the previously enforced restrictive measures remain in place. Alongside a considerable drop in external demand, the negative pressure this is exerting on economic activity is more extended than the Bank of Russia assumed in April. There was a significant drop in business activity in the services sector and manufacturing; a sizeable contraction was reported in the numbers of new orders in external and domestic markets; investment declined. Unemployment went up and incomes shrank. There was a considerable drop in retail sales. The phased lifting of restrictions between May and June is helping consumption-oriented sectors gradually recover. However, recent business surveys invariably reflect cautious sentiment.
The contraction of GDP in the second quarter could prove more sizeable than expected. At the same time, the Russian economy is gaining support from the Russian Government and the Bank of Russia’s additional measures aimed at the mitigation of economic effects of the coronavirus pandemic. In these conditions, GDP will decrease by 4-6% in 2020. Recovery growth of the Russian economy will continue in 2021-2022.
Inflation risks. Disinflationary risks prevail over pro-inflationary ones. Under the baseline scenario, disinflationary risks are chiefly connected with uncertainty as to further developments in the coronavirus pandemic situation in Russia and globally, the scale of possible measures to fight it and their impact on economic activity, as well as the speed at which both the global and Russian economies will recover as restrictive measures are mitigated.
The short-term pro-inflationary risks connected with a potential sizeable pass-through into prices of the recent ruble weakening as well as with the episodes of increased demand for several product groups have all been exhausted. However, disrupted supply chains as a result of the curbs and the additional costs of protecting personnel and consumers from the coronavirus spread could exert upward pressure on prices. The periods of strengthened volatility in global markets can be reflected in exchange rate and inflation expectations.
Medium-term inflation dynamics will be significantly impacted by fiscal policy parameters, in particular, the scale and efficiency of the Government’s measures towards mitigating the consequences of the coronavirus pandemic and overcoming structural constraints, as well as the speed of the 2021-2022 budget consolidation.
If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. In its further 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.
The Bank of Russia will hold its next key rate review meeting on 24 July 2020. The press release on the Bank of Russia decision is to be published 13:30 Moscow time.”
