Bank of Russia cuts key interest rate by 50 bps in December

The Bank of Russia lowered its key interest rate today by 50 basis points to 7.75 percent from 8.25 percent, a higher cut than expected. Also, the CBR stated that it will consider lowering the rate further next year as the inflation has eased below the target rate of 4 percent. In a statement, the central bank said that it will continue with its gradual transition from moderately tight to neutral monetary policy.

The Bank of Russian estimates show that most of annual inflation indicators reflecting the most sustainable price movements are slightly below 4 percent. The deceleration of inflation was conducive to a drop in inflation expectations, which nevertheless continues to be unstable and uneven. The anchoring of inflation close to 4 percent would need both further drop in inflation expectations and making them less susceptible to price changes.

According to the central bank, annual inflation is likely to be below 3 percent by the end of 2017 and is expected to come close to 4 percent by the end of 2018.

The central bank expects that the economic growth rate would be close to the potential at 1.7 percent to 2.2 percent by the end of this year. Thus, monetary conditions general low inflationary pressure without limiting economic growth. Even if October recorded inconsistent trends in the dynamics of economic activity, producer sentiment continues to be at a comparatively high level. It would be further underpinned by rising domestic demand amidst higher real wages and by the recovery of the global economy.

“Over the forecast horizon, economic growth will not exceed 1.5-2.0 percent, which corresponds to the current estimates of its potential level”, the central bank stated.

The central bank’s key rate decisions in the future will be based on its assessment of the balance of risks of inflation’s material and sustainable deviation in either direction from the target, as well as the dynamics of economic activity against the forecast.

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