Information Notice of Bank of Russia:
First. Annual inflation continues its decline in line with the Bank of Russia’s baseline forecast; however, this is largely due to temporary factors. Estimates as of 24 October indicate that annual consumer price growth was down to 6.2% from 6.4% seen in September. A meaningful contribution to the inflation reduction is made by the performance of the ruble exchange rate as oil prices have been higher than expected and Russian financial assets are becoming more attractive to external investors. Also, the good harvest helped lower food price growth. The disinflationary impact of domestic demand is however going down, which translates into slower deceleration of non-food product prices. Households have thus far been abiding by a saving-oriented model of behaviour. However, tentative signs of rising real wages may contribute to a gradual recovery in demand for goods and services. The key rate held at the current level long enough is expected to determine monetary conditions further on, which are critical to support incentives to save and shore up the trend towards sustainable inflation reduction, impacted by demand-side constraints. This will enable a further decline in inflation expectations.
Second.The level of interest rates in the financial market is responsible for moderately tight monetary conditions, expected to remain in the economy long enough. Positive real interest rates will be held at a level which, while securing demand for credit, will exclude heightened inflationary pressure and keep incentives to save. Tentative signs of recovery in consumer lending do not bear substantial inflation risks so far given that a considerable part of current loans is used to refinance previously extended loans.
Third.The revival of production remains unstable and varies across industries and regions. The Bank of Russia estimates that moderately tight monetary conditions do not hinder economic recovery, with structural factors being the main restrictions. The labour market is adjusting to the new economic environment, and unemployment remains stable and low. Import substitution is progressing and certain items of non-commodity exports show an upward trend. Industry, including high-tech production, finds new growth factors. However, they are still unable to ensure that overall production dynamics remains sustainably positive. At the same time, individual industries are stagnant or show lower output growth. The emerging signs of recovery in investment activity are persistently weak. Positive trends need time to develop and root. The year 2016 will see an overall 0.5-0.7% drop in the output of goods and services, while the fourth quarter is expected to post a slight quarterly growth. In 2017, economic growth will be low (under 1%). This forecast is based on conservative assumptions about low growth of the global economy, average oil prices of about $40 per barrel, moderate capital outflow, and persistent structural restrictions of Russian economic development.
Fourth. Risks remain that the 4% inflation target may not be reached in 2017. This mainly results from inertial inflation expectations, possible weakening of households’ propensity to save, and higher real wages not supported with a rise in labour productivity. No legislative decision has yet been taken with regard to specific medium-term fiscal consolidation measures, including the indexation of wages in the public sector and social benefits. Volatility of global commodity and financial markets may also have a negative impact on exchange rate and inflation expectations.