BOFIT Viikkokatsaus / BOFIT Weekly 2017/38

At its regular monetary policy meeting last Friday (Sept. 15), the CBR board decided to lower the CBR key rate by 0.5 percentage points to 8.5 %. It was the fourth rate cut this year. At the start of 2017, the rate was 11 %. The CBR still sees a further cut in the key rate possible during the remainder of this year.

The central bank said its last Friday's rate-cut decision was made largely on the grounds that inflation has been close to its 4 % target for the end of this year. Inflation fell in August to 3.3 %. In June, inflation was still running at 4.4 %. August's low score, however, was caused mainly by drops in fruit and vegetable prices, which saw unusually large seasonal declines (July-August prices have only experienced greater drops in four of the past 16 years). The CBR noted that one of the inflation risks comes from fluctuations of food prices and that overall the risk of inflation overshooting the target is larger than the risk of a downward deviation from the target.

The CBR noted inflationary risks coming also from swings in prices on global markets, wage increases, declines in the household savings rate and a powerful rise in consumption. It stressed that even if inflation expectations had (based on a survey it regularly orders) fallen to historically low levels, they were still not anchored at any low level and remain sensitive to price movements or changes in the ruble's exchange rate.

The CBR said it has specified its inflation target at around 4 % in the years ahead. The CBR did not set a fluctuation range for inflation, even if the possibility was discussed. Deviations of inflation from the target would only trigger a CBR response if they create a threat of longer-term departure e.g. via impacting inflation expectations. The CBR sees this summer's differences in inflation as a fluctuation within its inflation target rather than a deviation.