Central Bank of Russia did not argue about either rate or signal in Sept, its absence gives flexibility amid risks, uncertainty
MOSCOW. Sept 23 (Interfax) - Participants in the September meeting of the Central Bank of Russia's board of directors, when deciding to put the monetary policy easing cycle on pause, effectively did not argue about either the level of the key rate or the signal for the future, according to the summary published by the regulator.
Following the September 11 meeting, the Central Bank's board of directors decided to keep the key rate at 14% after ten consecutive cuts, noting a rise in pro-inflationary risks. Most analysts had expected exactly such a step from the Central Bank, although some experts allowed for a rate cut by another 25 basis point (bps) to 13.75%. For the second time in a row, the Central Bank left its statement without a directional signal, limiting itself to a neutral phrase that it would take further decisions on the rate depending on the dynamics of inflation and inflation expectations, as well as on the assessment of risks from internal and external conditions. On Wednesday, the Central Bank published its traditional summary following the board meeting.
Based on the analysis of new data and their comparison with the CBR's July forecast, "the participants in the discussion formed a broad consensus in favor of keeping the key rate at 14.00% per annum," the document said.
The main arguments in favor of this decision were as follows. First, a substantial strengthening of current inflationary pressure, including in the underlying part. In July, indicators of underlying inflation shifted into the range of 5%-6% in annual terms with seasonality removed. "The price dynamics were affected primarily by the situation in the fuel market and the effects that arose in connection with it. To assess how significant and prolonged their impact on underlying inflation will be, more data are needed," the CBR said.
Second, credit activity in recent months has remained at an elevated level. "Corporate lending grew at an accelerated pace. In combination with the high trajectory of budget expenditures, this may support faster growth of domestic demand. At the same time, a significant part of lending remains weakly sensitive to changes in the key rate. In these conditions, it is important to maintain sufficient tightness of monetary conditions so that credit growth and the budget impulse do not lead to excessive expansion of domestic demand and do not hinder the reduction of inflationary pressure," the Central Bank said.
The third argument is the significant contribution of budget policy to the growth of domestic demand. "The execution of federal budget expenditures since the beginning of the year has followed a high trajectory. In the medium term, the contribution of budget policy to demand may also be higher than previous estimates. Until the medium-term parameters of the budget are clarified, it is necessary to remain cautious when taking decisions on monetary policy," it said.
Another factor is the probability of a positive output gap emerging. "Domestic demand in the summer months remained high. At the same time, the temporary retirement of production capacities limited the possibilities for expanding supply and restrained the growth of the economy's potential. Such a combination could again lead to demand exceeding production capabilities and contribute to the strengthening of inflationary pressure," the CBR said.
The participants in the meeting agreed that a pause in changing the key rate "is justified given the current assessment of macroeconomic conditions." "By the next meeting, more data will emerge on the development of the situation in the fuel market, the scale of its indirect and secondary effects and the dynamics of underlying inflation, and the parameters of budget policy will also be clarified. If the situation develops in accordance with the baseline July scenario, the achieved tightness of monetary policy will be sufficient to ensure a more restrained growth of domestic demand and the resumption of a decline in inflationary pressure," the CBR said.
The participants in the meeting agreed that the absence of a directional signal about further steps in the sphere of monetary policy given the significant pro-inflationary risks and uncertainty will make it possible to preserve flexibility in taking further decisions.
