Balanced risk: the Central Bank of Russia lowered its key rate to 7% per annum

On Friday, September 6, the board of directors of the Central Bank decided to reduce the key rate by 25 basis points to 7% per annum.

Thus, this year the Russian regulator has reduced the rate for the third time.

An official comment by the Central Bank clarifies that the growth rate of the Russian economy remains below forecasts while maintaining high inflation expectations. This situation has affected the revision of consumer price growth.

“The slowdown in inflation continues. At the same time, inflation expectations remain at an increased level. The growth rate of the Russian economy is still below expectations of the Bank of Russia. The risks of a significant slowdown in the global economy intensified. By the end of the year, the risks of acceleration and deceleration of inflation are balanced. Under these conditions and taking into account the actual dynamics of inflation, the Bank of Russia lowered its forecast for annual inflation in 2019 from 4.2 - 4.7% to 4 - 4.5%. In the future, according to the forecast of the Bank of Russia, taking into account the current monetary policy, annual inflation will remain near 4%, ”the Central Bank said in a press release.

According to the Central Bank, annual inflation in August fell to 4.3% after 4.5% in July. The growth rate of the economy, which, as the Central Bank emphasizes, is still below the forecast, is explained by "weak dynamics of investment activity, including in terms of government investment spending."

“Given the weak economic activity observed since the beginning of this year, the Bank of Russia lowered its forecast for GDP growth in 2019 from 1 - 1.5% to 0.8 - 1.3%. In 2020 - 2021, the growth rate of the Russian economy was also revised down taking into account the expected slowdown in global economic growth. Acceleration of economic growth to 2–3% by 2022 is possible as the government takes a set of measures to overcome structural constraints, including the implementation of national projects, ”the Central Bank said.

The next meeting of the Board of Directors of the Bank of Russia is scheduled for October 25.

“Support for domestic demand and credit”

Earlier, the Ministry of Economic Development lowered the forecast for inflation in Russia for 2019 to 3.8%, in 2020 this figure is expected to reach 3%.

Experts attribute the decline in inflation to the seasonal factor. In a conversation with RT, Anna Bodrova, a senior analyst at Alpari Information and Analysis Center, explained that over the past two weeks, deflation has been recorded in Russia, that is, a decrease in prices.

“Now the season of fruit and vegetable production is in full swing, due to which we have reduced food inflation rates, they, in turn, affect national inflation. This situation in Russia is observed from year to year, ”said the expert.

According to the latest data from Rosstat, in August deflation amounted to 0.2% - for the first time since 2017.

“A change in the rate affects the economy with a certain delay from a few months to a year and a half. All these measures are aimed at maintaining domestic demand and domestic credit. But this is not a quick process, ”Kirill Tremasov, director of the LOCO-Invest analytical department, commented on the decision of the Central Bank of RT.

Interviewed experts predict a further decline in the key rate. Anna Bodrova suggested that the next decision to lower by 0.25 percentage points could be made in early 2020. In turn, Kirill Tremasov believes that already this year the rate will be reduced to 6.75%, and in the first quarter of 2020 - to 6.5% per annum.

“During the trade war between the USA and China, which worsens the situation on the world market and the high borrowing of Russians at low real incomes, it is necessary to activate the Russian economy and pay off credit pressure on borrowers. In addition, the need to fulfill the instructions of the president, who emphasized reducing the mortgage rate to 8%, and in the Far East to 2%. Therefore, another reduction in the key rate may occur before the end of the year, to 6.5% or 6.75%, ”Andrei Lyushin, deputy chairman of the board of CB Loko-Bank, suggested in a conversation with RT.

In trend

The actions of the Russian Central Bank are in line with the global trend among central banks. In summer, regulators in Brazil, India and other developing countries lowered rates. The American Fed decided to reduce the interest rate. Top management of the European Central Bank did not rule out a possible rate cut in the future.

Kirill Tremasov connects such processes with the weakness of the world economy and the course of regulators to suppress inflationary processes.

Earlier, the IMF lowered its forecast for global GDP growth in 2019 from 3.3% to 3.2%, and in 2020 - from 3.6% to 3.5%. The Ministry of Economic Development of Russia in its macroeconomic forecast allowed a reduction in global economic growth below 3% for the first time in ten years.