CBR keeps rates unchanged, but adjusts guidance

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/05

At its scheduled meeting last Friday (Jan. 29), the Central Bank of Russia’s board decided to leave the key rate unchanged at 11 %, the same level it has been at since August 2015. The CBR estimated that annual consumer price inflation was 10 % in January, which meant that real interest rates have turned positive for the first time in a year. The central bank expects inflation to slow further to less than 7 % by January 2017 and to reach the 4 % inflation target by the end of 2017. The CBR noted, however, that risks to deviating from the target at end-2017 have increased. The CBR indicated that the oil price is a key risk to price stability, because a drop in the oil price causes the ruble to weaken and fuels inflation expectations.

The CBR’s reference to the possibility of tightening monetary policy slightly surprised the markets. In December, the central bank signalled that it would begin gradual lowering of rates if inflation moderated in line with its forecast. The latest CBR announcement pointed to the possibility of monetary tightening in coming months if inflation risks further amplify. It further noted that the oil price is likely to be lower than in its December baseline forecast of $50 a barrel in 2016–2017, so Russia’s GDP development is expected to be even weaker than earlier predicted. In December, the central bank forecasted that GDP would still contract 0.5-1 % this year and return to modest growth in 2017. The CBR board’s next meeting on interest rates is set for March 18, 2016.

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