The Central Bank of Russia (CBR) has decided against cutting their interest rate, instead deferring until inflation falls within target of 5 to 6 percent.
August marks the eleventh month the rate remains unchanged. The official CBR statement said, “the decision was based on the assessment on inflationary risks and perspectives for economic growth.”
"In July and at the beginning of August the rate of inflation declined, but remained above the target range and as of 5 August 2013 was estimated at 6.5% over a year ago,” the CBR said in justification of leaving the the benchmark at 8.25 percent.
In recent months Russia’s economy has slowed, and some analysts believe the Bank missed its chance to lower the rate while the ruble was stronger. Russia’s GDP slowed to 1.2 percent in the second quarter, according to preliminary data by Rosstat, and hasn’t expanded since the fourth quarter of 2011, increasing the likelihood that the country will grow at well under 3 percent this year.
Russian academics say the country has entered a technical recession, as its basic industries contracted for 6 consecutive months.
Elvira Nabiullina, formerly an economic adviser to President Putin, took over as central bank chairman in June, and has repeatedly stated monetary easing as a goal. She didn’t make any big moves at her first Bank meeting as chairman, and in line with many policy makers, is hesitant to do so on such a weak ruble.
Friday was her second meeting acting as chair.
Experts' foresight
The CBR decision was largely anticipated, with economists split whether the regulator would cut the interest rate or wait until September to ease monetary policy in Russia’s contracting economy.
An overwhelming camp of analysts forecast no change, as officials signaled they were waiting for inflation to drop below 6 percent before decreasing the benchmark.
Goldman Sachs, JPMorgan, and Bloomberg predicted no change, citing the ruble’s inflation as evidence.
Most proponents of keeping the rate 'as-is' were worried about the negative effect the decision would have on the Russian stock market, which unchanged, will likely send equities into a five-day losing streak.
“A rate cut in these conditions could lead to big costs on the Forex market, so we doubt that there will be a rate cut," Alfa Bank analyst Dmitry Dolgin said prior to the announcement, Interfax reported.
However, HSBC chief economist for Russia and the CIS, Alexander Morozov, believed the CBR would cut rates by 25 basis points on Friday and by another 25 basis points in October, when inflation is expected to return to the targeted range of 5-6 percent. He said the situation has changed fundamentally in the past month, particularly the state of the economy. "While a month ago the economy was growing, data for July that has come in so far indicates a steep increase in the threat of a recession," Morozov said. Inflation, meanwhile, continues to slow and there has been a "slowdown in the structural part of inflation," which bolsters optimism that it will slow further, he said.