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Bank of Russia keeps key rate at 7.75%

The Bank of Russia stressed that uncertainty over future external conditions and their impact on financial assets prices remain

MOSCOW, February 8. /TASS/.The Bank of Russia decided to keep the key rate at 7.75% per annum, the regulator said in a press release following its Board of Directors’ meeting on Friday.

When commenting its decision the regulator noted that in January 2019, annual inflation held at the lower bound of the Bank of Russia expectations, while the contribution of the VAT increase to annual consumer price growth in January was moderate.

The effect of the VAT increase on inflation can be fully assessed no sooner than this April, the regulator said.

"In its key rate decision-making, the Bank of Russia will determine if the increases of the key rate in September and December 2018 were sufficient to bring annual inflation back to the target in 2020 (4% - TASS), taking into account inflation and economic performance against the forecast, as well as the risks associated with external conditions and financial markets’ response to them," the regulator said.

In 2018, the Bank of Russia raised the key rate twice due to growing inflation risks: in September (first time since 2014) from 7.25% to 7.5% and in December - to 7.75%.

Inflation dynamics

Taken into account the decision on the key rate, the Bank of Russia also maintained its forecast for inflation within the range of 5-5.5% by the end of 2019 and its return to 4% in the first half of 2020," when the effects of the ruble’s weakening and the VAT rise peter out."

"Faster growth of food prices to 5.5% (vs 4.7% in December 2018) played a significant role in the inflation rise in January," the regulator noted.

"The acceleration of food inflation is substantively attributable to the recovery after its considerable drop in the second half of 2017 and the first half of 2018. Furthermore, prices are completing their adjustment to the ruble’s weakening of the second half of 2018," according to the press release.

The regulator noted that household inflation expectations and price expectations of businesses rose slightly in January.

According to the regulator’s forecast, quarterly year-on-year consumer price growth is set to decelerate to 4% as early as the second half of 2019.

Inflation risks

The Bank of Russia stressed that uncertainty over future external conditions and their impact on financial assets prices remains.

Despite the oil price growth in January 2019, the risks of supply exceeding demand in the 2019 oil market remain high, the regulator noted.

"The revisions of the expected paths of monetary policy tightening by the US Federal Reserve and other central banks in developed markets reduce the risks of persistent capital outflows from emerging markets. At the same time, geopolitical factors might lead to strengthened volatility in commodity and financial markets, affecting exchange rate and inflation expectations," according to the press release.

"The balance of risks remains skewed towards pro-inflationary risks, especially over a short-term horizon, driven by the VAT increase and price movements in individual food products," the regulator said.

The Bank of Russia’s Board of Directors will hold its next meeting to consider the key rate level on March 22, 2019.