BOFIT Viikkokatsaus / BOFIT Weekly 2016/38

At its regular meeting on September 16, the Central Bank of Russia executive board dropped the key rate by 0.5 percentage points to 10.0 %. The CBR board, which last lowered rates on June 14, said its rate-cut decision reflected favourable inflation trends. Inflation expectations were down in August and annual inflation slowed to 6.6 % at the beginning of September.

The CBR also made clear in its announcement that no further rate cuts should be expected this year. The next rate cut at the earliest would come in the first half of 2017 and would require that inflation risks calm further and the inflation rate slows as expected. The central bank expects inflation to fall to around 5.5–6 % at the end of this year and says it is still on track to meet its 4 % inflation target at the end of 2017. CBR governor Elvira Nabiullina said that real interest rates should be 2.5–3 % as long as inflation and inflation expectations exceed the central bank’s target.

The CBR also revised downward its projection for economic growth next year. GDP is now forecast to grow in 2017 in the range of 0.5–1 % (earlier 1.1–1.4 %). Growth is also now expected to remain tepid in 2018–2019 (1.5–2 %). The CBR also announced plans to issue short-term OBR bonds as part of an expansion of the monetary toolkit for regulating bank liquidity. Liquidity has recently surged through such measures as draining the state Reserve Fund to finance budget deficits.

Despite the CBR rate cut and the recent decline in oil prices, the ruble’s exchange rate has been rather stable in September. The ruble-dollar exchange rate has been about 64–65 and the ruble-euro rate about 72–73. Diminished capital outflows have helped support the ruble’s exchange rate. The CBR estimates that the net outflow of private sector capital in the first eight months of this year amounted to about $10 billion, down from $13 billion in January-May. Net capital inflows in August amounted to about $1 billion. Such reversals are rather rare, but were also seen in June this year and August-September 2015. The next regular CBR board meeting is set for October 28.

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