Central Bank of Russia keeps key interest rate on hold at 7.25 pct

The Central Bank of Russia maintained its key interest rate at 7.25 percent today. While this was an expected move, the majority of market participants had expected a 25-basis point cut just one month ago, before the new sanctions against Russian by the U.S. In early April, the new sanctions hit the RUB, pushing up ruble volatility, as they led to a huge selloff in some Russian assets especially stocks. The central bank’s latest statement on the decision appears to be less dovish that previously, while the CBR continues to be calm about inflation prospects.

Russian inflation continues to be low due to long-term factors. A fall in inflation expectations gives a good reason for the CBR to cut further in 2018. External conditions bring additional cautiousness. The CBR stated that Russia’s country risk premium is up, while developed economies are set to continue monetary tightening. According to the central bank, there does not appear to be considerable inflation risk from improved economic activity.

“The CBR has seen “a rise in inflation risks”, which implies geopolitics, and emphasising the persistent uncertainty over fiscal decisions. However, the CBR’s estimate of risks linked to consumer and oil prices remains unchanged, which we see as a dovish note in the tone”, stated Danske Bank.

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