Bank of Russia keeps powder dry for future inflation and growth problems

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Bank of Russia keeps powder dry for future inflation and growth problems

Bank of Russia keeps powder dry for future inflation and growth problems
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Faced with the twin problems of rising inflation and weakening economic growth, Russia’s central bank has kept the cost of borrowing unchanged.

At their regular monthly meeting, Bank of Russia policymakers decided to keep the bank’s key interest rate at 8.0 percent – it has risen by 2.5 percent since early March.

That suggests they want to hold measures in reserve to boost growth as Western sanctions over the Ukraine crisis bite.

In reaction to the lack of interest change, the rouble fell to a fresh all-time low on Friday.

Annual inflation – which was already above targets – hit 7.7 percent this month, following the Kremlin’s sweeping ban on food imports imposed in retaliation for Western sanctions.

Maria Pomelnikova, a macroeconomic analyst at Raiffeisenbank in Moscow told euronews: “[From the central bank’s statement] we see it will focus on the more long-term effects of the food import ban, up till now it had only been thought there would be short-term effects. But if the risks are prolonged, or if new risks appear connected to the introduction of new sanctions, and with the geopolitical situation worsening, we can’t exclude that the central bank’s would take tough monetary policy measures and that interest rates would be raised again.”

The bank, which says inflation is set to remain above 7.0 percent this year, partly because of what it called an “aggravation of geopolitical tensions”, expects a further slowdown in economic growth in the back end of this year, but is still predicting 0.4 percent GDP expansion.

The bank has in effect abandoned this year’s official inflation target of 5.0 percent, as well as a wider range of 3.5-6.5 percent allowed under the bank’s rules.

It is instead emphasising its medium-term inflation target of 4.0 percent. The “current monetary policy stance will ensure decline in consumer price growth to 4.0 percent in the medium run”, the bank said.

Under current plans the bank aims to reach the 4.0 percent medium-term target in 2016. The bank said it stood ready to raise rates again if inflation expectations remained high, jeopardising this medium-term goal.