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Bank of Russia Raises Benchmark Rate
November 2, 2014 10:34


Photo Credit: http://banknewsinworld.blogspot.com
On 31 October 2014 the Bank of Russia decided to raise its key rate to 9.5 percent. The move was approved by the Board of Directors due to “significant changes in external conditions” in September-October, including a drastic fall in oil prices and tougher sanctions imposed by the West against several large Russian corporations. The past two months saw the ruble depreciating rapidly and coupled with the August food embargo further accelerated consumer prices.
According to the Bank of Russia estimates, “inflation will remain above 8 percent till the end of 2014 and in 2015 Q1.
“Continuing high growth of consumer price will result in persistent increase in inflation expectations creating additional inflation risks. The Bank of Russia will continue to take measures aimed at slowing down consumer prices growth to the target of 4% in the medium run,” said a statement on the bank’s official website.
"In September-October, inflation grew more rapidly than had been expected earlier. According to the estimates as of the 27 October, annual consumer price growth rate was 8.4%. Core inflation rose to 8.2% in September 2014. Acceleration of inflation was mainly provoked by accelerated price growth for food items from 10.3% in August to 11.4% in September. Price growth rates for non-food products remained stable at 5.5%. Inflation dynamics was mainly influenced by ruble depreciation and external trade restrictions imposed in August 2014," reads the press release.
According to the Bank of Russia estimates, annual GDP growth rate in 2014 Q3 was 0.2%. Economic slack does not have considerable restraining effect on consumer prices increase as it is mostly caused by structural factors. Utilisation of productive factors — labour force and commercially viable productive capacities — is high though labour productivity grows slowly. Due to the long-term demographic trends labour supply decreases. Besides structural factors, increased external political uncertainty has an adverse impact on economic activity. Amid limited access to long-term financing and higher borrower requirements from Russian banks, fixed capital investments are contracting.
At the same time consumer demand is cooling down as real wage growth and retail lending are slowing. External economic conditions have restraining effect on the Russian economy: oil prices see a significant decline while economic activity of most Russia’s trading partners remains weak. However, exchange rate dynamics and restrictions on the import of certain food items support some industries. According to the Bank of Russia estimates, economic growth rate in 2014 Q4 and 2015 Q1 will be close to zero.
Consumer prices growth is very likely to persist at the current level till the end of Q1 2015 due to remaining sizeable impact of restrictions on the import of certain food items and ruble depreciation in August-October 2014 on prices. Later, as the economy gradually adjusts to external trade restrictions and the impact of exchange rate dynamics on prices reduction, inflation and inflation expectations are expected to see a renewed decrease. Slower consumer prices growth will also be facilitated by subdued aggregate demand with aggregate goods and services output remaining below the potential. However, inflation decline will be slower than previously expected.
The Bank of Russia will continue to take measures aimed at stabilising inflation expectations and slowing down consumer prices growth to the target in the medium term. Should the external conditions improve, and inflation and inflation expectation show a stable downward trend, the Bank of Russia will be ready to start monetary policy easing.

The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 11 December 2014. If the external conditions improve and inflation and inflation expectation show a sustainable downward trend, the Bank of Russia “will be ready to start monetary policy easing”, promised the press release. 




Author: Mikhail Vesely

Tags: Central Bank     

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