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Russian Central Bank lowers key rate

June 10, 14:44 UTC+3 MOSCOW
The Central Bank lowered the key rate by 0.5 percentage points to 10.5% for the first time since August 2015
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Russian Central Bank

Russian Central Bank

© Sergei Bobylev/TASS, archive

MOSCOW, June 10. /TASS/. The Russian Central Bank lowered the key rate by 0.5 percentage points to 10.5%  for the first time since August 2015, according to a press release following the meeting of the Board of Directors of the regulator on Friday.

"The Board of Directors notes positive process of inflation stabilization, decline of inflation expectations and inflation risks amid signs of approaching phase of recovery growth," the report said.

The regulator’s decision was based on the growing confidence in sustainability of positive trends in inflation dynamics. "The rate of growth of consumer prices was lower than expected. Annual inflation stabilized at 7.3%, seasonally adjusted monthly inflation in annualized terms - 5%," the report said.

At the same time, monetary conditions remain moderately tough, despite some easing due to declining deficit of liquidity in the banking sector. That is "largely related to inertia of inflation expectations, absence of midterm strategy of the budget consolidation, and uncertainty in respect of further wages and pensions increase," the regulator said.

The next meeting of the Central Bank’s Board of Directors on the key rate is scheduled for July 29, 2016.

China's market 

Bank's chief Elvira Nabiullina said the bank expects managed slowdown of China’s economy growth.

"We assume there will be managed decline of growth rates of the Chinese economy and an absolutely controllable transition from one model of economic growth to another model," Nabiullina said.

The bank expects China’s transition to the model based on consumption sphere and services sphere, she added.

Bonds placement

According to Nabiullina, the Central Bank’s debut issue of bonds will amount to tens of billions of rubles and can be placed in the next 2-3 months.

"In the near future, in the coming two months, we are ready to make a test placement (of bonds of the Central Bank - TASS) for the sum of tens of billions of rubles. We will do it to see if this tool will be in demand," the head of the Central Bank said.

At the same time Nabiullina said that at present in terms of liquidity management the Central Bank does not see the need to issue bonds of the Central Bank.

"Because we are still in conditions of a slight structural deficit of liquidity," she said.

"We need to make preparations, to understand the preferences of the market but we are ready to do this even when the structural deficit of liquidity remains," she said.

On May 30, speaking at the State Duma, lower house of parliament, Nabiullina said that the Bank of Russia has all the tools to manage rates after the transition from the situation of structural deficit of liquidity to the structural surplus of liquidity.

Oil prices fluctuations

The bank's report said GDP dynamics in the first quarter of 2016 confirms higher resistance of the Russian economy to oil price fluctuations.

"Positive economic trends are not accompanied by higher inflation pressure. Data of GDP dynamics in the first quarter of 2016 and April macroeconomic indicators evidence higher resistance of the Russian economy to oil price fluctuations," the Central Bank said.

Import substitution and non-commodities export expansion processes continue developing and additional growth zones appeared in industrial production, the regulator said. Quarterly growth of GDP is expected at the latest of the second half of this year, it said.

Russia’s Central Bank does not rule out further decline in oil prices, bank's chief said, adding that normalization of economic situation influenced not only by improving oil market.

According to the chief, Central Bank’s basic scenario includes 2016 average oil price at $38 per barrel. The Bank’s optimistic scenario expects the price of Urals blend to remain at $50 per barrel until 2018.

"The optimistic scenario assumes that Urals oil price will remain at about $50 per barrel until the end of the forecast period," the regulator said.

According to the Central Bank, such trade conditions can be formed in case of a faster recovery of the global economy, which will prompt a much more rapid (in comparison with a the baseline scenarios) rise of interest rates by central banks in the world (especially the US Federal Reserve).

The bank does not  rule out that a drop in oil prices, so it still considers the risk scenario with the price of oil at $ 25 per barrel, as "the rise in prices in April-May was to a large extent associated with temporary factors, including supply disruptions and excessive optimism on world markets," according to the bank's chief.

Futher reduction 

"The Russian Central Bank is going to consider the possibility of further reduction of the key rate, assessing inflation risks and compliance of dynamics of inflation deceleration with the target trajectory," the report said.

According to  Nabiullina, current lowering of key rate cannot be perceived as beginning of reduction cycle. 

"We really believe that by using the right monetary policy we can reach the inflation target of 4% by the end of next year. There is, of course, potential for reducing the key rate, but the decisions - when and how much - depend on the economic situation, whether there are new inflation risk. We are not ready to say that this is the beginning of a new cycle," she said.

The current situation on the currency market is quite comfortable,  Nabiullina added.

"We now see that the situation on the currency market is comfortable enough, there is no demand, and this instrument - currency repo operations - is already not in great demand on the market," she said.

Inflation forecast

The Russian Central Bank does not expect exchange rate to have a pronounced effect on inflation in the near future, Nabiullina said.

"In the short term we do not expect exchange rate to have a pronounced effect on inflation," she said, adding "now we have become more confident about a steady decline in inflation and reaching the target of 4% by the end of 2017."

"In the future, the growth rate of consumer prices will continue to decline, primarily under the influence of demand constraints. The Central Bank lowered the inflation forecast for the end of 2016 to 5-6%. Considering the decision and continuation of the current trend of monetary policy the annual inflation will be less than 5% in May 2017 and will reach the target level of 4% at the end of 2017," the regulator said in the statement.

 Inflation expectations of population and business continue to amid remaining weak consumer demand and high savings rate, the report said. 

"Improvement of economic activity figures happens amid remaining weak consumer demand and high savings rate, without creating upward pressure on consumer prices. Inflation expectations of the population and businesses continue to decline," the report said.

 Risks of Russia’s inflation deviation from the 4% target level in 2017 declined but remained high, the statement said. "This is largely related to inertia of inflation expectations, absence of midterm strategy of the budget consolidation, and uncertainty in respect of further wages and pensions increase," the regulator said.

Volatility on global commodity and financial markets may also adversely affect exchange rate and inflation expectations, the bank said. "Implementation of these risks may the cause of inflation slowdown process delay," it said.

The key task of the Bank of Russia within the inflation targeting policy framework is to reach 4% inflation in 2017.

Inflation risks in Russia are caused mainly by domestic factors, bank's chief Elvira Nabiullina added.

"Gradual recovery of the economy we are expecting will not prevent inflation decline," Nabiullina said.

Recovery of the demand will not be above production recovery if "healthy conservatism of consumers" is present and inflation expectations decline further on, she added.

GDP forecast

The bank improved the outlook for Russia's GDP in the baseline scenario in 2016 to a decline of 0.3-0.7%, Nabiullina said.

"The forecast for GDP in the baseline scenario has changed. We have improved the outlook for GDP - we believe that at the latest in the second half of the year quarterly growth rates will be positive. But this year as a whole, so far we see a negative trend of GDP, which is much smaller than we expected. We are currently considering the range from -0.3% to -0.7% by the end of this year. We used to have a -1.3%, so that is quite a significant improvement of GDP forecast for this year," Nabiullina said.

"In the case of the prerequisites for the optimistic scenario come true, a more confident recovery in economic activity than in the baseline scenario is expected. In 2016, growth of GDP is forecasted to be close to zero, in 2017-2018 - in the range of 1.5-2%," the bank said.

The economic growth will be supported by the revision of the expectations of economic agents about the prospects for the Russian economy, in addition to improving the terms of trade.

According to the forecast of the Economic Development Ministry, decline of Russia's GDP this year will amount to 0.2%. It is expected to reach growth of 0.8% in 2017, of 1.8% in 2018, of 2.2% in 2019.

Foreign exchange market

Russia’s Central Bank does not consider in its basic scenario a possibility of entering the foreign exchange market to replenish foreign exchange reserves until the end of 2018, the bank’s chief said.

"Indeed, the ruble exchange rate volatility has declined. This is due to many factors, first of all, movements on the oil market, but in general, it is due to the fact that market players are getting more used to the floating exchange rate and hedge their currency risks. As for our purchase of reserves on the foreign exchange market, our basic scenario does not envisage such a possibility," she said.

Goods export and import rates

 Current account surplus of the Russian payment balance dropped 2.5 times in January - May 2016 to $17.8 bln, the bank said. The surplus was $43.9 bln in January - May of the last year.

"Goods export and import decline rates largely determining the current account dynamics slowed down with notable import recovery against remaining and more significant export drop in conditions of low energy prices," the bank said.

Capital outflow

Net capital outflow by the private sector decreased four times in January-May 2016 in comparison with the same period of 2015 to $12.7 bln, the bank said. 

"The main form of capital outflow was repayment of external liabilities by banks, albeit to a lesser extent than the previous year, while the volume of foreign assets in other sectors was on the level, which is comparable to the previous year," the regulator said in a commentary.

Earlier, the Central Bank predicted a net capital outflow of $40 bln in 2016, $47 bln in 2017 and $ 52 bln in 2018.

According to the baseline scenario of the Economic Development Ministry, the capital outflow in 2016 will be $40 bln against $58 bln in 2015. In 2017, capital outflow is seen at $30 bln, in 2018 at $ 25 bln, in 2019 at $20 bln.

According to the report by the Central Bank, in 2016, forced repayment of external liabilities by Russian companies and banks in conditions of international sanctions, will be the main component of capital outflow.

According to the schedule of repayment of external debt, banks and other sectors of economy will pay about $90 billion in 2016.

The estimate was revised downwards compared to the previous report, taking into account the updated forecasts of key macroeconomic indicators and the actual data for the first quarter of 2016, the regulator said.

The UK exiting the EU will not impact the Russian economy

The bank's chief said the United Kingdom exiting the European Union will not directly impact the Russian economy, but there are indirect risks.

"There are no direct risks for us from the United Kingdom exiting the European Union, but there could be indirect ones. If that happens, of course, there will be some consequences for the economy, for example, of the European Union, which is one of our largest trading partners, and in general for the world markets," Nabiullina said.

The ruble accelerates decline

The ruble accelerated decline after the decision of the Central Bank to lower the key rate.

Thus, as of 13:30 MSK, the dollar rose to 68.84 rubles, the euro - to 73.2 rubles. Before the Central Bank’s decision on the key rate the dollar rose to 64.67 rubles, and the euro - to 73.03 rubles.

By 13:50 MSK, the dollar fell to 64.7 rubles, and the euro - to 73.2 rubles.

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