Russian Central Bank cuts interest rates, raises growth forecast

Russia’s Central Bank cut its main interest rate from 9.25% to 9% at its meeting today.  On the back of good economic news it also raised 1-its growth forecast for the year to 1.3-1.8% from 1-1.5%.

Annualised inflation in Russia has actually edged up slightly to 4.2% in recent days.  This is however common at this time of year, and is explained by the price cycle of certain food products following the winter.  The normal pattern is for the annualised rate in Russia to rise slightly in June and then fall in July and August.

The true rate of price growth in Russia disregarding these seasonal factors is continuing to fall, as the Central Bank said in a statement it released today

In May, annual inflation remained unchanged month on month and settled near the target level. Annual inflation will remain close to 4% in the coming months, notes the latest release of the Bank of Russia’s information and analytical commentary Consumer Price Trends.

May saw continued decline in the annual growth of prices of non-food goods, services and food products excluding vegetable and fruit prices. Following a non-typical drop in vegetable and fruit prices in January-March (seasonally adjusted), they rose in April-May as a result of the depletion of the previous year’s vegetable stocks and a delay in the planting season amid unfavourable weather conditions.

In the coming months, stable components of inflation will continue to fall; this will mainly concern prices for non-food goods in the consumer basket. Weather conditions may produce a one-off effect on inflation. At the same time, experts do not anticipate any material deterioration in the vegetable and fruit market: a possible drop in the harvest of field vegetables caused by unfavourable weather conditions during sowing time may be offset by the output of greenhouse vegetables and an expanded supply as a result of a partial lift of the embargo on Turkish food imports.

Overall, annual inflation will remain near 4%. Monetary policy measures will seek to keep inflation at the target in the medium term.

09.06.2017

The good news on inflation and growth was echoed by Russian President Putin in his annual Q&A session yesterday, in which he spoke with unmistakable optimism about the economy, and explained the reasoning of the Central Bank’s cautious rate cutting policy

GDP growth was plus 3 percent at the end of the fourth quarter of 2016, plus 5 percent in the first quarter of this year, and up 1.4 percent in April this year. This makes for GDP growth of 0.7 percent overall for the first four months of 2017.

Industrial production is also on the rise. We had growth of 0.7 percent in the first quarter of this year. I have brought along some of the latest figures, so as not to forget anything, and I can share them with you too. These are the latest statistics.

Investment into capital assets is up 2.3 percent. We see an increase in car sales and mortgage loans, which all economies consider a clear sign of growth, and non-resource and non-energy exports are up by 19 percent.

Finally, another important macroeconomic indicator is inflation, and we have brought it down to a record low in modern Russian history. The figure today is 4.2 percent. This is an unprecedented result and it gives us reason to expect that we will reach our target figure of 4 percent by the end of the year.

The Central Bank’s gold and foreign currency reserves, our international reserves, are growing. We started 2016 with $368 billion and ended the year with $378 billion. Today, the figure is $407 billion. One of the most significant indicators that I must mention is investment into capital assets, which is growing at a faster pace than the economy as a whole.

The economy grew by 0.7 percent over the first four months of this year, while investment into capital assets was up by 2.3 percent. What does this mean in simple terms? It means that investment in developing production facilities is up by 2.3 percent, and this is laying the foundations for growth in the short term. This, of course, is a positive development that will have an impact on various aspects of the social sector too…….

Real wages started increasing in July or August 2016 and increased 0.7 percent by the end of the year. This increase is rather difficult to see, although it reached 2.3 or 2.4 percent in April this year….

I very much hope that the Central Bank continues to move cautiously towards reducing the key interest rate.

Why has the Central Bank adopted such a cautious approach? Unfortunately, the Russian economy still depends on oil and gas. The price of natural gas depends on the price of oil, and a special formula is used to calculate it. The price of oil has recently exceeded $50, and today it is only $48, I think. The Central Bank believes that if it declines, the key interest rate would have to be adjusted. What matters most for us right now is not the key interest rate itself, but avoiding any sharp fluctuations in the key interest rate. We need to ensure a stable exchange rate for our national currency, the ruble. This is what underpins the Central Bank’s cautious approach. Some may like it, others may not. I am simply trying to explain the Central Bank’s logic. It deserves respect.

The fall in Russia’s inflation and the speed of the Russia’s economy’s return to growth has in fact beaten all expectations.  Moreover this recovery appears to be investment rather than demand led.

The faster than expected fall in inflation has enabled the Central Bank to cut interest rates more quickly than it anticipated, increasing the prospects of higher growth.

Though the Russians expect oil and gas prices – still very much their primary export product – to fall towards the end of the year despite the frantic efforts of the Saudis and others to prop them up, as Putin’s comments show they are now confident that they can ride out the consequences, and expect the recovery of their economy to continue to strengthen over the coming months.