CBR monetary policy programme foresees drop in inflation and heavy reliance on Reserve Fund

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/47

The Central Bank of Russia’s latest monetary policy programme keeps in place almost all the outcome of its September economic forecast, with the basic scenario largely unchanged. The difference is a cut in the figure for 2015 imports; now the volume of imports is expected to drop 26–30 % this year along with related adjustments in demand components. The 2016 forecast remains unchanged – including the assumptions on the average price of Urals oil ($50), GDP contraction (0.5 % to 1 %) and the drop in imports (about 2 %). CBR governor Elvira Nabiullina pointed out that the GDP forecast, in fact, entails that economic recovery will begin in the second half of 2016.

The CBR expects inflation numbers to become lower so that consumer prices in the first quarter of 2016 will be 8 % higher y-o-y (12-month inflation is currently at nearly 15 %) as the spike in prices last winter enters the 12-month calculation. The CBR’s inflation target is 4 % by the end of 2017, and as long as on the projected track the CBR is ready to gradually reduce its key rate.

The dependence of banks on the central bank for maintaining liquidity has decreased this year due to a contraction in bank lending from last year and a return of household deposits. The CBR now expects its receivables from liquidity provision to shrink considerably by the end of 2016 and further on as the credit stock of banks is foreseen to increase slowly (next year 4–7 %) and banks should enjoy incoming money boosts as the government dips into the Reserve Fund to cover budget deficits.

The CBR estimates that Russia’s current account surplus will continue as imports remain depressed, and anticipates foreign currency reserves to remain roughly unchanged. The central bank expects to restart its programme of buying small amounts of currency to gradually build up its foreign currency reserves from about $370 billion currently to $500 billion. The forex purchase programme was active in early summer this year. Nabiullina said the goal of the programme is to create a safety buffer, but that reaching the reserve’s planned size should take at least five years.

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