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Published: March 18th, 2015

The Bank of Russia lowered the key rate (one-week REPO rate, the main instrument for liquidity provision to banks) at 1% down to 14% per annum, a press release following the meeting of the Board of Directors of the CBR announces. The rate is reduced due to continuing risks of significant cooling of the economy.

 As inflationary risks are weakening, the Bank of Russia will be ready to continue the reduction of the key rate.

 A trend in the inflation decline

 Prevailing economic conditions in the Russian Federation form a trend in the inflation decline, the regulator supposes.

 Current monetary conditions will contribute to slower growth in consumer prices, the regulator explains. Thus, the annual growth rates of money supply (M2) declined significantly compared with the beginning of 2014.

 The substantial increase in bank interest rates on loans and stricter requirements for the quality of borrowers and guaranteeing led to slower of economy lending growth in annual terms (adjusted for currency revaluation). However, according to the Central Bank estimates, a growth of wages in the Russian Federation in the public sector, a possible revision of growth of regulated prices and tariffs and easing of fiscal policy are key risks for inflation dynamics, a press release says.

 Thus the regulator stressed that, despite the reduction of the key rate, it remains high enough for formation of interest rates on deposits at the level, supporting savings activity of the population.

 Annual inflation in Russia will decrease by March 2016 to 9% with the current direction of monetary policy, the Central Bank expects as well. Russia's GDP will decline by 3.5-4.0% in 2015. In the previous forecast the Central Bank estimated the fall in GDP by 0.7%.

 The second reduction

 This is the second reduction of the key rate this year - on 30 January the regulator has already lowered it from extremely high 17% down to 15%. The majority of TASS respondents-analysts (9 of 15) expected today a further decline in rates due to a triple slowdown in annual inflation (from 0.6 to 0.2%) and stabilization of the rouble.

 According to the Central Bank, annual inflation remains high. On 10 March the annual rate of increase in consumer prices amounted to 16.7%. The core inflation in February rose to 16.8 %. The monthly growth rate of consumer prices fell from 3.9% in January to 2.2% in February.

 "The high level of annual inflation is mainly due to the influence of factors on the supply side: weakening of the ruble and foreign trade restrictions. Their impact is short term and will be exhausted before the end of 2015," – the release underlines.

 According to analysts, second in a row from the beginning of the year reduction of the rate is justified by continuing threats of recession, about which the regulator has already warned in the end of January.

 "The slowdown in credit growth is already beginning to impact negatively on the economy. High level of interest rates becomes a problem. Symptom definitely requires treatment," – the chief economist at Sberbank CIB Mikhail Motovnikov assures.

 "There is no better opportunity to lower the rate significantly, as this Friday," – the economist at Credit Suisse Alexey Pogorelov stated.

 The next meeting of the Board of Directors of the Central Bank on monetary policy will take place on 30 April.

  

Publication source: TASS