The Central Bank of Russia Left the Rate Unchanged

It is to be reminded that the Central Bank of Russia consistently cut its key rate this year after its dramatic surge in December 2014 for stabilizing the situation on the financial market. The last time the rate was cut at the Russian Central Bank’s meeting held on 3 August 2015, however, at the meeting held on 11 September 2015 which preceded the last one the Russian Central Bank did not reduce the key rate. The main factor behind the above policy of the Central Bank consists in the fact that both the actual rate of inflation and inflationary expectations in the Russian Federation are still high with the situation in the real sector of the economy stabilized.
As of 26 October 2015, the year-on-year rate of inflation (in the past 12 months) was equal to 15.6%, that is, there was actually no slowdown of the rate of inflation since summer. In addition to the above, from 1 October till 26 October 2015 the rate of inflation amounted to 0.7%, while in entire October 2014 it did not exceed 0.8%.
In other words, no slowdown of the inflation rate was observed. Certainly, year-on-year reduction of the rate of inflation is inevitable at the end of the year, as the inflationary surge of the late 2014 was related to a considerable depreciation of the ruble which is unlikely to take place again. But the rate of reduction of the rate of inflation happens to be lower than expected before. It is to be noted that according to surveys of the Central Bank of Russia in September inflationary expectations of economic agents rose which situation complicates stabilization of the rate of inflation.

In such a situation, the decision of the Central Bank of Russia to retain the key rate at the same level appears quite justified. As long as real rates on loans to non-financial institutions remain at a low level, while inflationary risks are still high, easing of the monetary policy is not expedient. In addition to the above, cuts in the rate could result in a new depreciation of ruble, thus creating an additional inflationary pressure.

Pavel Trunin, Leading Researcher