‘The economy is gradually moving towards a recovery phase’
In the previous article of this series, we considered two of the five factors that the Bank of Russia considered in its December meeting while laying out the course for monetary policy. Central bank chief Elvira Nabiullina moved on to the third factor which was related to recovery in the economy.
She informed that the pace of Russia’s GDP (gross domestic product) contraction slowed down to 0.4% in Q3 2016. Due to the strong showing by industrial output, the Bank is hopeful for a slight expansion in GDP growth in Q4 2016. However, she noted that the rise in industrial production and investment is yet to be seen across the board.
‘Changing inflation risks’
Though inflation expectations of households has declined, the pace is not as quick as expected by the central bank.
However, Nabiullina said that clarity in regards to specific dimensions of fiscal policy has emerged, thus reducing inflation risks due to the aforementioned factor. The central bank expects fiscal consolidation and moderate indexation of tariffs and payments to keep a check on inflation.
‘The recent development in external markets significantly boosts the odds for the higher oil price scenario’
The last factor that the Bank of Russia considered while formulating monetary policy in December 2016 was the impact of two key events:
- US Presidential election results
- Deal to cut crude oil production
According to the assessment of Bank of Russia, the joint impact of the aforementioned events may lead to higher crude oil prices (USO) (BNO). However, the central bank is continuing to be conservative in terms of its price forecast.
How does it impact you, the investor?
The information and analysis contained in this series points to that fact that the Bank of Russia is poised to cut rates as soon as Q1 2017 given that risks to inflation do not materialize.
A reduction in interest rates, which is known as monetary easing, would provide further fillip to the Russian economy and can reflect in Russia-focused funds (RSX) as well. Though tighter monetary conditions will be maintained in order to check inflation, lifting of economic sanctions on Russia by the US and crude oil prices remaining above $50 a barrel would prove immensely beneficial to the country. In the long-run, it would help in reducing the Bank of Russia’s monetary base (shown in the graph) as well.
