The bank of Russia reported that the risks of inflation will disallow additional financial easing after the fourth time of reducing its main interest rate in order to counter an impending recession this year.
According to a statement by the central bank on its website, there was a 1% point reduction in the one-week auction rate to 11.5%. From a number of 35 economists, 21 of them had predictions that align with other projections of reduction ranging from 150 basis point to a basis point of 50.
With the price growth already about four times the mid-term prediction of the central bank, which is 4 percent, the central bank is in the process of fine-tuning its position, after the March declaration of the smallest rate decrease. The implication of the looming risk on inflation is that rate setters are given less flexibility to offer economic relief, which according to the data released on Monday, contracted higher than what was estimated in the first quarter.
According to Bank of Russia Governor Elvira Nabiullina’s statement to Moscow reporters, due to the weight of rate cuts during this year meeting, it is not a certainty that the central bank will act to take such decisions and maybe not in every meeting. She also added that “situations will decide everything, we are not actually certain about what is to come.”
The Bank of Russia worked out a 2% reduction in points in January, decreasing 100 and 150 basis points during its March and April meetings.
Ruble bonds
Declines were erased by the ruble, following the declaration and traded 0.2% stronger at 54.6790 as compared to the dollar at exactly 4:51 p.m. in Moscow. There was a reduction in the basis points of yield three to 10.62% due to the rise in government ruble bonds, which will be due in February 2027.
There is a scaling back of bets of derivatives traders on a fall in the cost of borrowing. There are signs of 45 basis points of reductions in the coming three months by the forward-rate agreements, certainly this year.
“With a further decline in consumer-price growth, the Bank of Russia also keep cutting the key rates,” a statement by policymakers. They also added that inflation risks will limit the monetary policy’s easing capability over the next few months.”
Is inflation under control?
As Nabiullina claimed that inflation is “under control,” she made an argument opposing a quicker rollback of the emergency increase in the previous year, which resulted in the 17% benchmark.
On Monday, the central bank declares the trend of inflation risks to be moving in the form of a predictable worsening of the conditions of external economy, slacker fiscal policy, high inflation anticipations and variations in state-regulated prices and tariffs intended for 2016-2017.
The Finance Minister, Anton Siluanov stated that the slacker stance of the growth in price as well as pressure on budget will necessitate endurance of constricted monetary and fiscal policy by the world’s leading energy exporter.
Siluanov commended the move of the central bank on Monday, and it was reported by the state-run RIA Novosti that he made open his desire for a further reduction in the benchmark rate.
Inflation, which over 13 years reached 16.9% in March, was eased by 1.1% to 15.7% in May. According to the central bank, there is an expected growth in price at 15.6% come June 8.
Nabiullina projected a drop in inflation to about 11% by December, and that it will be close to the 4% target in mid-2017.
“There are risks of inflation, and we will keep an eye on the unfolding of the economic processes,” Nabiullina stated. “At present, our predictions show that the key rate will continue to decrease. However, the pace and magnitude of the expected decrease cannot be foretold.”
Economic refreshing
In the process of policy adjustment by the central bank as a reaction to inflation, it has been mentioned that Russia is experiencing “further economic cooling.” Policymakers reported that there will be a 3.2% shrink in the Gross Domestic Product (GDP), compared to the 4% shrinkage predicted earlier. According to the central bank, there will be a 0.7% expansion in the economy in 2016 provided that oil prices are restored to $70 per barrel later in 2016.
On Monday, the Federal Statistics Service in Moscow reported that there was once a 2.2% contraction in the GDP during the first three months in a previous year, the first experienced since 2009, and a 1.9% cut from a previous estimate. According to assertions from Bloomberg surveys, there will be a 4% shrink in the economy during the 2nd and 3rd quarters.
Oleg Kouzmin, a one-time central bank adviser and now economist at Renaissance Capital in Moscow, stated in an email that the decision was taken because of the improvement in inflation behavior. Also, the central bank pointed that “there has been a twist in the balance of risks resulting in a noticeable economic cooling following a further easing of inflation risks.”