"Amid ruble appreciation and significant contraction in consumer demand in February-April 2015, monthly consumer price growth declines and annual inflation tends to stabilise.
According to the Bank of Russia forecast, consumer price growth will slow down faster than expected. Annual inflation will fall to less than 8% in a year (April 2016 on April 2015) and to the target of 4% in 2017. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate," the Central Bank of Russia said in the statement Thursday.
Bank Governor Elvira Nabiullina has already cut the interest rate twice in 2015, by one percentage point in Marchand by two percentages points in January. Both have been efforts to backtrack on the 6.5 percent increaseto 17 percent on December 16, which was done in an attempt to put a plug on the hemorrhaging ruble.
The ruble has responded well to the interest rate reductions, and in 2015 has gained more than 15 percent, making it the best performing currency this year. The rally is in part thanks to higher oil prices – Brent is over $65 per barrel- as well as a less turbulent situation in neighboring Ukraine and more attractive Russian bonds. On Thursday, one US dollar only bought 51 rubles, compared to December’s plunge when the greenback bought over 70 rubles.
The Central Bank has indicated that the ruble has gained enough, and is taking active steps such as tinkering with the REPO rate to keep it stable. Higher interest rates make it more expensive for businesses to take out loans, which can stymie economic growth.
Lower lending rates could in theory further spike inflation, which reached 16.9 percent in March. The Bank has to perform a balancing act between keeping the ruble strong and inflation low. The Bank hopes to quell inflation to nine percent by March of 2016, and four percent in 2017.
GDP in Russia is forecast to contract in 2015 after only expanding 0.6 percent in 2014. The Economy Ministry forecasts a 2.8 percent decline, whereas the Central Bank sees a worst case scenario of a loss of four percent.
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