Key Rate at Russian Central Bank Reaches Record Low

Russia’s Central Bank has lowered its key rate by 25 basis points to another record low of 4.25%, according to a statement published by the regulator following its board meeting on Friday, TASS reported.

“On 24 July 2020, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 4.25% per annum. Disinflationary factors continue to exert considerable influence on inflation,” the regulator said.

If the situation develops in line with the baseline forecast, the Central Bank will consider the necessity of further key rate reduction at its upcoming meetings, it noted.

The Bank of Russia Board of Directors will hold its next key rate review meeting on September 18, 2020.

Inflation and risks

The Central Bank also downgraded its inflation forecast for 2020 from 3.8-4.8% to 3.7-4.2% for 2020, whereas in 2021 inflation is expected to be 3.5-4%.

“A significant easing of monetary policy since April aims at curbing this risk and stabilizing inflation close to 4% over the forecast horizon. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will reach 3.7-4.2% in 2020, 3.5-4.0% in 2021 and will stay close to 4% later on,” the Central Bank said.

In the context of prevailing disinflationary factors there is a risk that in 2021 inflation might deviate downwards from the 4% target, the regulator added.

Medium-term inflation dynamics will be significantly impacted by fiscal policy, in particular the scale and efficiency of the government’s measures towards mitigating the consequences of the coronavirus pandemic and overcoming structural constraints, as well as the speed of the 2021-2022 budget consolidation.

Economic activity

The Bank of Russia expects the economy to be recovering gradually, as the restrictions are being lifted step-by-step. The revival of business activity is still moderate and uneven across industries and regions, the regulator said. “In June, the decline in industrial production, the contraction of orders in both external and domestic market, and the growth of unemployment slowed down. Proxy indicators suggest a slight rebound in investment activity. Recovery continues in retail trade and the services sector. Consumer demand was supported by the fiscal policy measures. At the same time, weak external demand coupled with restrictions under the OPEC+ deal lead to a drop in exports, causing an adverse effect on economic activity,” the statement said. Further economic recovery might be unstable due to a fall in incomes, moderate consumer behavior, cautious sentiment of businesses and external demand-side restrictions.

GDP is projected to decrease by 4.5-5.5% in 2020. The Russian economy is thereafter expected to follow a recovery path with growth predicted to total 3.5-4.5% in 2021 and 2.5-3.5% in 2022, the Central Bank said.

The Russian economy is gaining support from the Russian government and the Bank of Russia’s measures aimed at mitigating economic effects of the coronavirus pandemic, including the monetary policy easing and regulatory measures implemented by the Bank of Russia, the regulator noted.

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