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Financial News: Russia CB Likely To Cut Rates Further On

Russia CB Likely To Cut Rates Further On Lower Inflation Expectations

09/22/2017 - 08:01:00 (RTTNews)

(RTTNews) - Russia's central bank is likely to cut interest rates in the near future amid lower inflation expectations as the economy is facing the large amount of spare capacity, William Jackson, an economist at Capital Economics, said.

The Board of Directors decided to cut the key rate by 50 basis points to 8.50 percent, the Bank of Russia said in a statement on September 15.

This followed a temporary pause in the easing cycle in July, after 100 basis points of rate cuts in the first half of the year.

Bank of Russia Governor Elvira Nabiullina, however, struck a predictably cautious tone at post-meeting press conference, the economist observed.

The recent rate cut was clearly motivated by August's CPI data, with the annual inflation falling to a post-communist low of 3.3 percent, well below the central bank's 4.0 percent target.

The cautious tone of the accompanying statement stressed that the risks of inflation overshooting the Bank's target "dominate" the risks of it overshooting target.

The bank also raised concerns about capacity constraints - not just labor shortages, but also in production capacity.

Meanwhile, Nabiullina repeatedly mentioned that inflation expectations were not yet anchored at target.

The Board merely "deems it possible" to cut interest rates again over the next couple of quarters and Nabiullina said she saw the key rate at 6.5-7.0 percent in 2019.

Capital Economics continue to think the Russian economy is operating with a sizable output gap that should help to ease price pressures, even as the economy recovers.

The firm expects headline inflation to stay below the bank's target over the forecast horizon.

"If we're right that inflation will stay below target, that's likely to prompt the Bank's Board to lower interest rates by more than they are currently suggesting is probable," Jackson predicted.

Finally, Nabiullina stated that the inflation target is no longer 4.0 percent by the end of 2017, but rather close to 4.0 percent, although she said it was premature to talk about introducing a specific target range.

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