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Russia’s Central Bank maintains key rate

April 27, 13:38 UTC+3

The Russian Central Bank decided to maintain the key rate at 7.25%

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© Sergei Bobylev/TASS

MOSCOW, April 27. /TASS/. The Russian Central Bank decided to maintain the key rate at 7.25% on April 27, the Central Bank said after the meeting of its Board of Directors.

After the previous meeting of the Board of Directors on March 23, the regulator lowered the rate by 25 basis points (0.25 percentage points) against the previous level of 7.5% in a background of record low inflation.

"Annual inflation remains low. The April weakening in the ruble against the backdrop of geopolitical tension will be a factor for consumer price growth paces to quicken as they move closer to 4%. However, this does not create risks of inflation overshooting the target. At the same time uncertainty remains over the potential impact of the recent developments on inflation expectations. Inflation is forecast to range between 3-4% as of the end of 2018 and hold close to 4% in 2019," the regulator said.

The new decision on the rate was made in sharply changed conditions. On April 6, the United States introduced new sanctions against Russia, bringing down Russian securities and weakening the ruble. Markets compensated some losses, but analysts did not expect the Central Bank further soften its policy after the April shock, the consequences of which are yet to be assessed. "Uncertainty remains over the potential impact of the recent developments on inflation expectations," the regulator said.

Inflation in Russia is expected to range between 3-4% as of the end of 2018 and hold close to 4% in 2019, the Central Bank said.

"The Bank of Russia estimates that the ruble weakening will quicken inflation movement to 4% without the risks of overpassing this level, unless the external environment changes considerably. Inflation is forecast to range between 3-4% as of the end of 2018 and hold close to 4% in 2019," the regulator said.

Overall, inflation remains low, the Bank of Russia added. "Consumer prices grew at the pace of 2.4% in March, and consumer price growth in April is estimated at 2.3-2.5%," the statement said.

The Bank of Russia notes growth of inflation risks due to external and internal factors, including geopolitical ones. "The Bank of Russia registers a rise in inflation risks triggered by some internal and external factors. First, geopolitical factors and accelerated yield growth in advances economies may cause surges in volatility in financial markets and affect expectations for the exchange rate and inflation. Furthermore, uncertainty still persists over the dimensions of fiscal decisions, which are needed to estimate the impact of such decisions on inflation," the Central Bank says.

Russia’s monetary policy will be neutral in 2018, the bank said. 

Potential key rate reduction

The potential for the Central Bank’s key rate reduction has shrank, while the estimated neutral interest rate has shifted close to the upper bound within the 6-7% range, the Central Bank said.

"The Bank of Russia’s estimates suggest that the potential for key rate reduction to shape neutral monetary conditions shrank somewhat. As the country risk premium increased and interest rates were revised upwards in advanced economies, the estimated neutral interest rate has shifted closer to its upper bound within the range of 6-7%," the regulator said.

Overall, inflation remains low, the Bank of Russia added. "Consumer prices grew at the pace of 2.4% in March, and consumer price growth in April is estimated at 2.3-2.5%," the statement said.

The Bank of Russia still assumes that monetary policy will become neutral in 2018.

 GDP growth

Russia’s Central Bank projects GDP growth of 1.5-2% in 2018, the Central Bank said.

"GDP growth rate is estimated at 1.3-1.5% in the first quarter and 1.5-2% as of the end of 2018, which is in line with the potential economic growth rate," the regulator said.

Output growth continued throughout March, including industrial output, and capacity utilization increased. "Business activity keeps on expanding and is hardly posing any disinflationary pressure on consumer price movements. This paves the way for inflation to return to 4%," the statement said.

The ruble grows

The ruble continues to grow against the dollar and the euro by 2-3 kopecks after the decision of the Russian Central Bank to keep the key rate at the level of 7.25%, according to the Moscow Exchange.

In particular, the dollar exchange rate fell to 62.5 rubles, the euro traded at around 75.61 rubles.

After the introduction of new US sanctions on April 6, the ruble fell by 12-13% against the dollar and the euro on April 9-11, to the lows of 2016.

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