Russia Raises Key Interest Rate to 17%

Russia raises key interest rate to 17% from 10.5%.

Statement (converted from Russian):

The Board of Directors of the Bank of Russia has decided to increase from December 16, 2014 the key rate to 17.00% per annum. This decision was driven by the need to limit significantly increased in recent devaluation and inflation risks.

In order to enhance the effectiveness of interest rate policy loans secured by non-marketable assets or guarantees for a period of 2 to 549 days from 16 December 2014 will be granted at a floating interest rate established at the level of the key rate of the Bank of Russia increased by 1.75 percentage points (previously these loans for a period of 2 to 90 days, provided at a fixed rate).

In addition, to enhance the capacity of credit institutions to manage their own currency liquidity was decided to increase the maximum amount of funds to repurchase auctions in foreign currency for a period of 28 days from 1.5 to 5.0 billion. US dollars, as well as on similar operations for a period of 12 months on a weekly basis.

Earlier Statement:

Deterioration of external conditions in September – early December 2014 presented a new challenge for the monetary policy. Decline in oil price continued against the backdrop of its excess demand in the world market and US dollar appreciation. Under the existing financial sanctions imposed on Russian companies the domestic foreign exchange market demonstrated growing demand for foreign currency. This brought about a considerable depreciation of the ruble against major world currencies, the ruble’s volatility grew, depreciation and inflation expectations increased, and there was a significant rise in inflation risks and risks to financial stability.

To stabilise foreign exchange market, the Bank of Russia adopted a set of measures: it introduced refinancing facilities in foreign currency, employed a conservative approach to manage banking sector liquidity, and, among other things, set limits on ruble liquidity provision through FX swaps. Besides, in November 2014, the Bank of Russia abolished its exchange rate mechanism implying the conduct of regular interventions in line with established rules, which, in fact, signified the transition to a floating exchange rate regime. In doing this, the Bank of Russia reserved the right to conduct interventions in case of the emergence of any threats to financial stability. In early December 2014, due to the ruble’s significant deviation from the fundamental level and the excessing increase in its volatility posing a threat to financial stability, the Bank of Russia intervened in the FX market on several occasions.

Ruble depreciation observed in August-November 2014 led to a further acceleration in consumer price growth. Restrictions on the import of certain food products imposed in August 2014 spurred inflation as well. These factors caused consumer prices to increase year-on-year from 8.0% in September to 9.1% in November. In early December, the upward trend of the said factors remained. According to Bank of Russia estimates, inflation will be about 10% at end-2014, and the contribution of the accumulated ruble depreciation from end-2013 to the annual consumer price growth might reach 2.6 percentage points. In October 2014, in order to limit the exchange rate pass-through, the Bank of Russia decided to raise the key rate in October and December 2014 by the total of 250 bp to 10.50% p.a. The Bank of Russia stands ready to continue tightening the monetary policy in case of the further aggravation of inflation risks.

Unfavourable external factors hampered the growth of the Russian economy. In view of existing economic uncertainty, restricted access to international capital markets, escalating prices of imported investment goods and tightening lending conditions, fixed capital investment also declined. At the same time, exchange rate dynamics raised the competitiveness of Russian products both in the external and domestic markets, and set the ground for the import substitution. Notwithstanding the drop in the growth rates of households’ real income and retail lending, consumer activity demonstrated a slight increase. This was driven by an enhanced demand for certain groups of consumer goods, primarily durable ones, amid increased inflation expectations. Labour force shortage persisted, whereas unemployment remained low due to unfavourable demographic factors.

The Bank of Russia revised the medium-term macroeconomic forecast. The average annual oil price is expected to remain at $80 per barrel till end-2017. The access to foreign capital markets will be restricted for Russian companies in the forthcoming three years. In view of the above, there will be further reductions in the fixed capital investment in 2015-2016. Consumer activity will remain weak against the backdrop of declining growth in real disposable income and consumer lending. At the same time, exchange rate dynamics will counterbalance reduction in export revenue, and weak domestic demand will bring down import growth rates. As a result, net export contribution to the economic growth will be positive. In line with Bank of Russia forecasts, the annual economic growth will remain close to zero in 2015-2016. In 2017, as financing sources will diversify, import substitution will develop and the competitiveness of Russian exports will improve, the annual economic growth rates are expected to reach 1.0-1.2%.

The Bank of Russia forecasts the start of consumer inflation slowdown in the second half of 2015. Before that, inflation will stay at enhanced level. Its decline will be facilitated by an exhausted impact of the August-November ruble depreciation on prices, subdued aggregate demand, drop in inflation expectations, and Bank of Russia measures adopted in 2014. According to Bank of Russia forecasts, inflation will decrease to the level close to the target in 2017. At the same time, there exist risks of more significant fall in oil prices. Should oil prices remain at $60 per barrel till end-2017, GDP growth will reduce to -4.5-(-4.7)% in 2015 and - 0.9-(-1.1)%

in 2016. Further ahead, as the economy will adapt to changes in external conditions, partly facilitated by exchange rate dynamics, the economic growth rates are expected to increase to 5.6-5.8% in 2017. In 2015, inflation will be higher than the baseline scenario. In future, inflation is expected to be under a considerable downward pressure from the weak domestic demand. As inflation and inflation expectations decrease, the transition to more loose monetary policy will become possible. According to Bank of Russia forecasts, consumer price growth will decelerate to the level close to the target in 2017.

You May Also Be Interested In

• Asian FX is an important driver of USD, says ING
• Stocks have priced in much of the 2024 optimism - Wells Fargo
• Tesla (TSLA) continues to slide, breaks under $150