In anticipation of secondary effects from tax decisions: why the Central Bank left the rate unchanged

As analysts predicted, the Bank of Russia on Friday kept its key rate at 7.25% per annum. its decision The regulator explained by the fact that it sees the risks of acceleration of inflation in 2019 above 4% due to the increase in VAT. In addition, the Central Bank allowed a surge in volatility in the financial and currency markets.

Details

• Quote: "The main risks are associated with high uncertainty about the scale of secondary effects of the adopted tax decisions (primarily from the reaction of inflationary expectations), as well as external factors," the regulator writes. However, those figures that the Central Bank names are within the framework of the previously announced guidelines.
• The Bank of Russia predicts that inflation will accelerate to 3.5-4% by the end of 2018 (it was 2.3% in June, 2.5-2.6% is expected in July), and also above 4% in 2019 due to planned increase in VAT. "This will have a one-time effect on prices," the Central Bank specifies.
• Geopolitical factors and the rapid growth of yields in developed markets, according to the Central Bank, "may lead to bursts of volatility in financial markets and affect exchange rate and inflation expectations."
• The Central Bank also made it clear that the proposal to cut rates should not be expected until early next year. The Bank of Russia considers the most likely transition to a neutral monetary policy in 2019, the report says. The Central Bank considers the rate in the range of 6–7% to be neutral. Previously, the regulator planned to reach this level this year.
• According to the Central Bank, in 2018 the economic growth rate in 2018 will be 1.5-2%. The report also assesses the impact of the World Cup on annual GDP growth in the second quarter - at the level of 0.1–0.2 percentage points.

Context

• The Ministry of Economic Development, in its July review, also predicted an acceleration of inflation. According to the agency, by the end of 2018 it will accelerate from 2.3% per annum to 3.1%, and by the end of 2019 inflation will increase to 4.3%. In 2020, price growth will slow down to 3.8% and then return to 4%.
• The decision of the Central Bank confirms the assessment of analysts polled by Reuters, who previously predicted that the regulator would not reduce the key rate. In their opinion, the regulator will wait to see how the business will react to the decision to raise VAT from 18% to 20% next year, keeping the rate at 7.25%.

Since the Central Bank plans to return to a further reduction in rates not earlier than the beginning of next year, then serious changes in rates on loans and deposits for the population should not be expected until that time.

Liana Faizova