The Central Bank of Russia keeps key rate unchanged
The Central Bank of Russia, in its meeting on February 3, 2017, kept its key rate unchanged at 10%. In the entirety of 2016, the central bank had changed its key rate twice by a cumulative 100 basis points, or 1%.
In its note on monetary policy, the central bank informed that inflation has been benign and its performance has been as expected. It also noted that while inflation expectations are subsiding slowly, the Russian economy is “recovering faster than previously expected.”
Economic activity is above expectations
The Central Bank of Russia noted that economic recovery in Russia was above the Bank’s expectations. The driving force behind the higher than expected economic growth is crude oil prices whose average annual figures were close to baseline assumptions for 2016. The Russian economy entered the growth territory in H2 2016 as per quarterly economic growth rates, a trend which the Bank expects to continue and expand in Q1 2017.
The Bank noted that “Annual GDP is expected to show positive growth in 2017; however, the rates of economic growth will be low. It takes structural improvements and time for the positive trends to advance and become sustainable.”
Inflation continues to fall
The Central Bank of Russia attributed the fall in inflation to temporary factors like the ruble exchange rate in 2016 and strong crop production. The Bank informed that estimates until January 30 show that annual consumer price fell from 5.4% in 2016 to 5.1%. It expects annual inflation to reach its 4% target in late 2017 and remain around that level in 2018.
Crude oil production cut to impact inflation
The OPEC (Organization of the Petroleum Exporting Countries), in 2016, had decided to cut crude oil production. Meanwhile, 11 non-OPEC nations had agreed to reduce production by 558,000 barrels per day. Russia is not an OPEC member and of the non-OPEC quantum, it is expected to reduce its production by 300,000 barrels a day.
This cut is expected to impact oil companies like LUKOIL (LUKOY) and Rosneft (OJSCY). However, the Central Bank of Russia holds that the production cut may lead to higher crude oil prices (USO) (BNO) in the short-term, which are expected to support inflation.
After this overview of the February policy announcement, let’s look at how dollar buying by the central bank is expected to impact its monetary policy in H1 2017.