Russia’s central bank left its key interest rate unchanged on Friday, for a fourth consecutive month, citing the deterioration in the global commodity markets and higher risk of inflation accelerating. The bank also signaled that it may have to tighten policy, if inflation risks amplify.
The Board of Directors decided to keep the key rate at 11.00 percent, the Bank of Russia said in a statement. The decision was in line with economists’ expectations.
“The key rate decision has been made in recognition of the current economic situation, with elevated risks of continued recession provoked by falling oil prices,” the bank said.
“The high debt load of Russian companies and interest rate risks for banks and their borrowers have also been factored in.”
The central bank said the monthly consumer price growth rates stabilized at a high level, on the backdrop of yet another oil price slump. There is a higher risk of accelerated inflation, it added.
“The bank also noted that the deterioration in the global commodity markets will require a further adjustment of the Russian economy.
The bank expects annual inflation to decrease to a point below 7 percent as early as January 2017, and reach the 4 percent target by late 2017. However, the risks have grown that inflation may deviate from the target in late 2017, the bank said.
“Should inflation risks amplify, the Bank of Russia cannot rule out a tightening of its monetary policy,” the bank said.
The recent weakening of the ruble is putting pro-inflationary pressure and causes inflation expectations to grow, despite a slowdown in annual inflation, the central bank pointed out.
According to the bank, annual inflation is set to drop from 12.9 percent for December to approximately 10 percent for January. Consumer prices are expected to grow 8-9 percent year-on-year in the first quarter.
“There are risks that inflation in the second quarter may accelerate, caused by, among other factors, the low base effect,” the bank said.
Thereafter, annual consumer price growth rate is expected to resume its decline on the back of reduced inflation expectations and monetary policy.
The balance of payments and the economy will have to be further adjusted to lower global prices for the key Russian exports, leading to “a more sizable GDP contraction in 2016” than forecast earlier, the central bank said.
“The additional adjustment may take several quarters. The GDP growth rate will enter positive territory in 2017, but will be low,” the bank said.
The next policy session of the Bank of Russia is scheduled for March 18.
The material has been provided by InstaForex Company – www.instaforex.com