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Russia’s Central Bank keeps key rate at 10% for third time in a row

February 03, 14:10 UTC+3

Given the internal and external developments, the Bank of Russia’s capability to cut its key rate in the first half of 2017 has diminished

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© Pavel Smertin/TASS

MOSCOW, February 3. /TASS/. The board of directors of Russia’s Central Bank decided to keep the key rate at 10% per annum at its first board meeting in 2017 on Friday.

The next meeting of the Central Bank’s board to review the key rate is scheduled for March 24, 2017.

On inflation

Inflation performance has been generally in line with the forecast, the regulator said in a press release. Meanwhile, risks remain that inflation will be above the target level of 4% in 2017, though inflation risks are abating on a mid-term horizon, the report said.

"Given the internal and external developments, the Bank of Russia’s capability to cut its key rate in the first half of 2017 has diminished," the regulator said.

The Bank of Russia believes the monetary policy should be maintained as moderately tough for steady contraction of inflation.

"In order to maintain the propensity to save and anchor sustainable inflation slowdown driven by demand-side restrictions, monetary conditions should remain moderately tight," the Central Bank said.

This will also contribute to ongoing decline in investment expectations of population and business, the regulator said.

Positive real interest rates will be maintained at a level ensuring the demand for loans not entailing higher investment pressure and keeping incentives for saving, the Bank of Russia said.

On GDP growth

Russia’s Central Bank expects GDP to grow in 2017 but the growth rate will be low.

"GDP is expected to grow as of 2017 year-end but economic growth rates will be low. Structural transformations and time are needed to develop and reinforce positive trends," the Central Bank said.

"Annual GDP is expected to show positive growth in 2017; however, the rates of economic growth will be low. It takes structural improvements and time for the positive trends to advance and become sustainable," the regulator said.

"Economic recovery in 2016 was somewhat above the Bank of Russia’s expectations, as the average annual oil price was close to the baseline scenario assumptions," according to the statement.

"The Bank of Russia estimates that quarterly GDP growth rates entered positive territory in the second half of 2016, with the positive trend set to hold into the first quarter of the current year. Growth in industrial production (partially driven by import substitution) is ongoing, and so is expansion of non-oil and gas exports in several categories; investment activity is gradually perking up. Unemployment remains steadily low. The labor market is adjusting to the new economic environment, with signs beginning to emerge that skilled labor shortages are finding their way in individual segments," the regulator noted.

"The observed annual rise in real wages will foster gradual growth in consumer activity. It will come without additional pro inflationary pressure amid a rise in supply of goods and services," the regulator said.

On purchases of foreign currency

The launch of the Finance Ministry-conducted purchases of foreign currency on the domestic forex market is among short-term inflation risks, Russia's Central Bank said.

"External political and economic uncertainty remains elevated, which may negatively affect expectations as regards exchange rate and inflation. Maintenance of moderately tight monetary conditions will constrain inflation risks, including the short-term ones, coming from the launch of the Finance Ministry-conducted purchase of foreign currency in the FX market," the report said.

According to Russia's Central Bank, the Finance Ministry-conducted purchases of foreign currency on the domestic forex market will have an immaterial effect on money market rates.

"The Bank of Russia will manage banking sector liquidity with due account taken for the Finance Ministry’s purchases/sales of foreign currency in the FX market and their effect on the money market rates will be almost immaterial," the report said.

 

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