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Russia’s Central Bank cuts key rate to 8.5%

The bank notes that inflation is close to 4% while the economy keeps growing.

MOSCOW, September 15. /TASS/. Russia’s Central Bank slashed its key interest rate by 0.5 percentage points to 8.5% per annum, the regulator said in a statement on Friday.

"On 15 September 2017, the Bank of Russia Board of Directors decided to cut the key rate by 50 b.p. to 8.50% per annum," the statement said. The Bank of Russia noted that inflation is close to 4% while the economy keeps growing. During the next two quarters, the regulator "deems it possible to cut the key rate further," the report said. The Bank of Russia sees the possibility to reduce the key rate further in the next two quarters, the regulator said in a press release on the results of the meeting of the Board of Directors. When deciding on further cut of the key rate it will proceed from the assessment of inflation risks and economic activity, the regulator said.

Meanwhile, medium-term risks of inflation overshooting 4% dominate over the risk of its steady downward deviation from the target, the Central Bank said. "In order to maintain inflation close to the 4%, the Bank of Russia will continue to conduct moderately tight monetary policy," the report said.

"While making its decision hereinafter, the Bank of Russia will assess the risks of inflation’s material and sustainable deviation from the target, as well as consumer price movements and economic activity against the forecast," the regulator said.

"Fluctuations of food prices will remain the source of inflation volatility over the next six months. Food price dynamics will depend on the quality and preserved volumes of the harvest. Short-term food market factors might trigger temporary deviation of inflation (both upward and downward) from the 4%, which, however, will not persist," the statement said. 

According to the regulator, noticeable changes in the prices for the consumer goods and services most often purchased by the population feed through to inflation expectations dynamics rather quickly.

Inflation continues to decline in the non-food goods market as services price growth has stabilized around 4%, the Central Bank said. Food price growth decelerates due to the seasonal cheapening of vegetables and fruit, which has exceeded preliminary estimates.

Key sources of medium-term inflation risks remain unchanged, the regulator said. "First, there are potential price fluctuations in global commodity markets. Implementation of the budget rule will reduce risks linked to oil price movements. Second, labor productivity growth may lag considerably behind the wage growth as the structural shortage of labor force aggravates. Third, inflationary pressure may stem from changes in households’ behavior as the propensity to save becomes much lower. Fourth, inflation expectations remain highly sensitive to changing prices for individual groups of goods and services and exchange rate movements," the regulator reported.

GDP growth 

 Bank of Russia has raised its forecast for GDP growth in 2017 to 1.7-2.2%, the regulator said. "In Q2, GDP growth exceeded the forecast figures. Economic growth was spurred by investment and consumer demand along with the recovery of production inventories." the press release said.

"In view of the positive trend set by Q2, the forecast for GDP growth in 2017 has been revised upwards to 1.7-2.2%," the regulator said.

"Further GDP growth above 1.5-2% a year is attainable if structural reforms are put in place," the regulator added.