Bank of Russia raises key rate

The Bank of Russia Board of Directors decided to raise the key rate by 0.25 pp to 7.75% per annum, the regulator said in a press release issued after the Board of Directors.

"The decision taken is proactive in nature and is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon. There persists uncertainty over future external conditions, as well as over the reaction of prices and inflation expectations to the upcoming VAT rate increase. The increase in the key rate will help prevent firm inflation anchoring at the level significantly exceeding the Bank of Russia’s target," the regulator says.

The Bank of Russia will consider the necessity of further increases in the key rate, the regulator said.

The increase in the key rate will help prevent firm inflation anchoring at the level significantly exceeding the Bank of Russia’s target, the regulator explained.

"The Bank of Russia will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets," according to the press release.

Key rate hike will help maintain real interest rates on deposits, support their attractiveness, the regulator said. 

Oil market
The Central Bank notes increased risks of supply exceeding demand in the oil market in 2019.

"In the fourth quarter, oil prices remain above 55 US dollars per barrel included in the baseline scenario assumptions for 2019-2021. However, the risks of supply exceeding demand in the oil market in 2019 have increased," the regulator said.

Meanwhile, it added that high uncertainty over future external conditions and their impact on financial asset prices remains.

VAT increase
The forthcoming VAT (value-added tax) rate increase might have a slight constraining effect on business activity in Russia, mostly in the beginning of the year, the Central Bank said.

"The Bank of Russia’s view of the Russian economy’s mid-term growth prospects has remained mainly unchanged. In 2019, the forthcoming VAT increase might have a slight constraining effect on business activity (mostly in the beginning of the year)," the statement said.

Infation
In 2018, inflation in Russia is expected to be around 4%, which is in line with the goal of the Russian Central Bank.

"At the end of 2018, inflation is expected to be close to 4%, which corresponds to the Bank of Russia’s target. In November, the annual consumer price growth rose to 3.8% (3.9%, according to the estimates as of 10 December). This November’s upward movement of inflation was largely driven by annual food price growth accelerating from 2.7% to 3.5%. This was supported by changes in the balance of supply and demand in certain food markets," the Central Bank said.

According to the report, consumer price growth is starting to be affected by the VAT increase scheduled to take effect from January 1, 2019. According to Bank of Russia estimates, most inflation indicators reflecting the most sustainable price movements are growing.

The Bank of Russia forecasts consumer price growth rate at 3.9-4.2% by the end of 2018.

GDP growth rate
The growth rate of Russia's GDP in 2019 will be in the range of 1.2-1.7%, the economic growth rates could increase in the future, the Russian Central Bank said.

"The newly attracted budgetary funds will be used to boost government spending, including spending on investments, as early as 2019. As a result, according to the Bank of Russia forecast, GDP growth in 2019 will range between 1.2% and 1.7%. The following years might see higher growth rates as the planned structural measures are implemented," the regulator said.

Foreign currency
Russia's Central Bank will resume the regular purchases of foreign currency as part of the budgetary rules for the Ministry of Finance, starting on January 15, 2019.

"The increase in the key rate is proactive and will limit the risks of inflation staying at a level significantly exceeding the Central Bank goal. The forecast takes into account the decision made by the Bank of Russia to resume regular purchases of foreign currency on the domestic market as part of the budgetary rule, starting on January 15, 2019," the regulator said.