Russia cuts key interest rate by 25 bps to 7½%; inflation remains low

By Tali Rackner

Minneapolis, Feb. 9 – The Bank of Russia’s board of directors decided to cut its key interest rate by 25 basis points to 7½% on Friday, saying annual inflation held sustainably low at 2.2% in January.

The bank said in a notice that permanent factors slow down consumer price growth alongside temporary factors. In addition, permanent factors may have a stronger effect on inflation than previously estimated.

In January, annual consumer price growth dropped across all staple goods and services. Food inflation slowed to 0.7% while non-food inflation declined to 2.6%; service prices increased by 3.9%. According to Bank of Russia estimates, most annual inflation indicators reflecting the most sustainable price movements are below 4%.

The bank said the fourth quarter of 2017 saw a slowdown in economic activity. Some uncertainty remains in the assessments of the reasons behind this slowdown, also due to temporary factors.

“Short-term pro-inflationary risks have abated. Therefore, the balance of inflationary and economic risks has shifted slightly towards the risks to economic growth,” the bank said in the notice.

“The uncertainty over the situation in global financial markets has increased.

“This year annual inflation is much less likely to exceed 4%. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.”

The bank cut the key rate by 50 bps at its previous quarterly meeting in December.

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