Russia's CB keeps interest rate flat against inflation

By bne IntelliNews October 30, 2015

bne IntelliNews -

The board of directors of the Central Bank of Russia (CBR) on October 30 decided to keep the key interest rate flat at 11% for the second consecutive time, given the "persistence of considerable inflationary risks", the regulator said in a release.

The CBR, which is squeezed between double digit inflation (albeit widely seen curbing to 7% by the end of 2016) and the first recession since 2009, was expected to keep the rate flat or at most cutting 50bp, according to the latest expert survey by Reuters.

Since the last meeting in September, the CBR did not see a significant change in the balance of economic and inflationary risks and continues to wait for tight monetary and credit policies, coupled with weak domestic demand to curb inflation.

The CBR conceded that despite the expectations of inflation slowing down to 7% by October 2016 and 4% by 2017, in September-October y/y price growth slowed down insignificantly, and inflationary expectations remain elevated.

Most recent weekly inflation data showed that daily and monthly inflation in the last week of October accelerated, ytd inflation figure topping 11% and approaching the CBR target of 12-13% for whole 2015.

At the same time, the CBR noted that September showed a number of signs of slowing economic recession. However, recovery is still hampered by absence of structural reforms, negative output growth, and unfavourable demographics.

Meanwhile, the labour market, characterised by stable low unemployment, is adjusting mainly through lowering real wages and growing part-time employment, the CBR said. This, together with slow retail crediting growth, will keep consumer spending suppressed, the central bank argues.

Also investment demand will continue to be weak, contained by limited options to replace sanctioned external financing sources and high debt burden of real sector companies.

The CBR also noted that further developments in the economy largely depend on global hydrocarbon prices, setting another indicator to watch ahead of the final central bank board meeting due on December 11, 2015.

The bank had previously been expected to continue the monetary easing cycle and cutting the interest rate to 10% and below by the end of 2016. However, it kept the key interest rate unchanged at 11% in September due to inflationary pressures and economic growth outlook deteriorating in July and August.

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