Information Notice of Bank of Russia:
Annual inflation has moved close to the target level. Annual consumer price growth is down to 4.3% from 4.6% in February. Inflation slowdown was broadly facilitated by the ruble appreciation amid relatively higher oil prices, persistent interest in investment in Russian assets among external investors, and a drop in the sovereign risk premium. These months saw food inflation unusually low for this period, supported by the high level of supply including bumper harvests of 2015-2016.
Domestic demand continues to exert a disinflationary effect. Households broadly tend to demonstrate savings behaviour patterns. There are signs of nascent recovery in consumer activity. Consumer expenditures are expected to restore gradually as real disposable incomes continue to show weak growth.
In order to maintain the propensity to save and anchor sustainable inflation slowdown driven by demand-side restrictions, monetary conditions should remain moderately tight. Positive real interest rates are held at the level which ensures demand for loans without increasing inflationary pressure and upholds incentives for saving. A gradual decline in nominal interest rates and the easing of non-price bank lending conditions will remain. Given banks’ conservative policy stance, these trends will mostly influence high-quality borrowers.
The Bank estimates that the economy continued to recover in the first quarter and expects fixed capital investments to increase. Industrial production is maintaining positive dynamics and unemployment is showing a downward trend. The labour market is adjusting to the new economic environment, with signs beginning to emerge that labour shortages are finding their way in individual segments. According to the estimates, the observed annual rise in real wages will foster gradual growth in consumer activity without posing additional proinflationary pressure amid increased supply of goods and services.
Given the current recovery dynamics and the economy’s growing resilience to the fluctuations in the external economic climate, the Bank of Russia expects that the GDP will grow in 2017-2019 even if the conservative oil price scenario materialises.
Possible volatility of global commodity and financial markets caused, among other things, by negotiations between oil exporting countries to extend agreements on limiting oil production may become the key source of inflation risks in the near future. It may result in a temporary hike in volatility of capital flows and the exchange rate undermining exchange rate and inflation expectations. That said, inflation risks will be lower in the scenario with rising oil prices. Legislative consolidation of a budget rule will also mitigate medium-term inflation risks.
In making its decision on the key rate, the Bank of Russia will assess the probability of the baseline scenario implementation (where oil prices drop to $40 per barrel) and the scenario with rising oil prices, alongside with assessing inflation and the economy dynamics relative to the forecast. The Bank’s assessment of the overall potential of the key rate reduction before the end of 2017 is unchanged. Given the decision taken and moderately tight monetary policy sustained, the Bank of Russia forecasts that the annual consumer price growth will reduce to 4% before the end of 2017 and will remain within this target level in 2018-2019.