December 11, 2015, 14:41 / Economics

The Central Bank kept the rate at 11%

The regulator sees rising inflation risks and the threat of lower oil prices Ekaterina Mereminskaya Olga Kuvshinova

Among the internal risks, the Central Bank sees the persistence of elevated inflation expectations and a revision of those planned for 2016-2017. rate of tariff growth and overall easing of budget policy / E. Razumny / Vedomosti

The Board of Directors of the Central Bank on Friday, at its last meeting this year, decided to maintain the key rate at 11%. Inflation risks have increased, the regulator explained in a press release, while the risks of a cooling economy have remained the same.

The regulator is underestimating the significance of inflation risks, says chief economist at Alfa Bank Natalia Orlova, . His forecast for 2016 has not been changed - about 6% by the end of the year, meanwhile, only foreign trade restrictions with Turkey can add up to 2 percentage points to inflation, Orlova believes, and not 0.2-0.4 percentage points, as the Central Bank calculates.

The decision was made based on three factors, Central Bank Chairman Elvira Nabiullina said at a press conference: the increased likelihood of oil prices remaining below $50/barrel; more favorable dynamics of the Russian economy than the Central Bank expected; Inflation dynamics are worse than the Central Bank expected.

The Central Bank's decision coincided with the consensus forecast of economists: 22 out of 35 surveyed by Bloomberg expected the rate to remain at 11%, 13 predicted a reduction. Rising inflation expectations, the emergence of new inflation risks, renewed weakening of the ruble, a likely increase in the Fed rate at the upcoming meeting and the uncertainty of the reaction markets to this decision - all this does not contribute to reducing the rate, economists listed.

The Central Bank promised to resume the rate cut at one of the next meetings - “the next three,” Nabiullina clarified, calling for attention to the conditions for such a resumption: if inflation slows in accordance with the Central Bank’s forecast and inflation risks weaken.

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On December 7, the annual growth rate of consumer prices was 14.8% after 15.6% in October: this is slower than the Central Bank expected, and at the end of the year the inflation rate is at the upper limit of the Central Bank’s forecast - about 13%, Nabiullina said. In the first quarter of 2016, inflation will slow down to 7-8%, and by the end of 2016 - to about 6%, the Central Bank expects.

In November, the population's inflation expectations increased, although they were expected to decline, she noted. The Fed's policy introduces uncertainty: although the likely rate hike in December has already been factored into the price of assets, the further dynamics of the US Federal Reserve's interest rates remains unclear - whether they will rise quickly or slowly. “I don’t think the Fed will raise rates quickly and sharply,” Nabiullina noted, but uncertainty remains for investors. Another risk factor is the oil market. The relevance of the Central Bank's risk scenario for 2016 has increased, Nabiullina noted. It assumes a barrel price of $35, a decline in GDP of 2-3% and a slower slowdown in inflation - up to 7% by the end of 2016.

The Central Bank did not dare to continue the reduction due to the acceleration of inflation in early December and rising inflation expectations, says Oleg Kuzmin from Renaissance Capital. The population reacted very quickly to the depreciation of the ruble and the introduction of tolls for heavy vehicles, he believes. “Plato” is not even mentioned in the Central Bank’s release, which may be correct, since the direct contribution to price growth will be insignificant, but there is already an indirect impact in the form of increased inflation expectations, says Kuzmin.

The direct contribution of the introduction of a tax on trucks to inflation (what can be calculated based on the planned amount of the fee) is about 0.1-0.2 percentage points, Nabiullina said. But there are still risks associated with the functioning of commodity chains. In November, a FOM survey assessing the population’s inflation expectations for the Central Bank recorded citizens’ concerns about the influence of “Plato” on price growth.

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The Central Bank may lower the rate at its January meeting, Kuzmin does not rule out. If oil prices remain at least at $40 per barrel, then during January - April the rate may be reduced by 1 percentage point and by 1.5 percentage points for the entire 2016. If prices rise, if the average annual price is $50-60 per barrel, the rate at the end of 2016 could be up to 7-8%, Kuzmin believes.

But it is possible that the pause will last longer. The rate will not change throughout 2016, Orlova believes. And this will be a positive signal for the market: the sooner it understands that the regulator has stopped cutting rates, the more comfortable it will work, she explains.