At its April 28 board meeting the Bank of Russia decided to lower the key interest rate by 0.5% to 9.25%. The regulator did not meet expectations of the financial market participants who forecast a 0.25% cut.
"The board of directors said that inflation has approached the target, pointing to a continuing drop in inflation expectations and also recovery of economic activity. At the same time, inflation risks persist. Amid moderately tight monetary policy the 4% inflation target will be reached until end 2017 and will remain close to this level in 2018-2019," the Bank of Russia said in a press release.
When deciding on the key rate going forward, the Bank of Russia will assess the odds of the baseline scenario (an oil price drop to $40 per barrel) and a scenario with rising prices, and also the future pace of inflation and economic development against the forecast. "Meanwhile, the assessment of the possible general scope of rate cuts by the Bank of Russia until end 2017 remains unchanged," the Bank of Russia pointed out.
The Central Bank of Russia has lowered the rate for the second time this year. This was done before at the previous backbone meeting in March. The regulator found appropriate the current economic indicators (a faster-than-expected slowdown of inflation, a decrease in inflation expectations, ruble appreciation, and gradual recovery of economic activity) and the degree of external risks (geopolitical and commodity market risks) to launch a gradual monetary easing cycle.
Market participants polled by Banki.ru share the regulator's viewpoint. The real key rate (adjusted to inflation and expected by the Bank of Russia in a year's time) stands at around 5.75%, while in 2016 amid stress conditions, when inflation ran far above the 4% target, the regulator kept the real rate at 5-6%. According to the Bank of Russia, the economic environment is now more favorable and it is not reasonable to maintain a tight monetary policy stance. .
Both monetary policy meetings are remarkable because before then Bank of Russia officials made public statements that monetary easing would be put on the table. Such openness is untypical for the regulator. As a consequence, the markets priced the rate cut to at least 9.25% into current prices.
Now investors are focused the regulator's further actions, with still five monetary policy meetings scheduled until end 2017 (June 16, July 28, September 15, October 27 and December 15).
