2019.06.1410:18:00UTC+00Russia Slashes Key Interest Rate, Signals More Easing

Russia's central bank cut the key interest rate for the first time in over a year in line with its earlier guidance, and hinted at more reduction in future amid slowing inflation and weaker growth. The Board of Directors, led by Governor Elvira Nabiullina, decided to cut the key rate by 25 basis points to 7.50 percent, the Bank of Russia said in a statement on Friday. The bank had kept the rate unchanged for three policy sessions in a row.

The previous change in the rate was a quarter-point hike in December 2018. A similar size raise was undertaken in September last year, which was the first since 2014.

The latest reduction was the first in over a year since a quarter-point reduction in March 2018. While annual inflation is slowing, expectations remain elevated, the bank said, adding that short-term pro-inflationary risks have abated compared to March.

"The ruble's strengthening since the beginning of the year made an additional contribution to inflation slowdown," Nabiullina said Inflation is estimated to have reached 5 percent in June from 5.1 percent in May.

The central bank expects growth to remain below its expectations in the first half of the year. Citing these circumstances, the Bank of Russia trimmed the end-of-the-year annual inflation forecast for 2019 to 4.7-5.2 percent from 4.2-4.7 percent.

The outlook was lowered as the pass-through of the VAT increase to prices has been completed and the relatively favorable external conditions and moderate domestic demand have been sustained.

The bank continues to expect annual inflation to stay close to 4 percent. "If?the situation develops in?line with the baseline forecast, the Bank of?Russia admits the possibility of?further key rate reduction at?one of?the upcoming Board of?Directors' meetings and a?transition to?neutral monetary policy until mid-2020," the bank said.

"The revision of?the interest rate paths by?the US?Fed and other central banks in?advanced economies in?2019 H1?reduces the risks of?persistent capital outflows from emerging markets," the bank said.

The central bank also cut its GDP growth forecast for 2019 to?1.0-1.5 percent from 1.2-1.7 percent. The bank expects the growth momentum to improve in coming years due to the implementation of national projects and reach 2-3 percent in 2021. ING economist Dmitry Dolgin said the the Bank of Russia has returned to an easing cycle with the latest reduction and could cut the key rate further by 50-100 basis points in the next 12 months. "We now see high likelihood of a couple of cuts in July and September," Dolgin said.

"The longer term path appears less certain, given recent indications of an easing in budget policy from 2020."