On December 14, 2018, the Board of Directors of the Bank of Russia decided to raise the key rate by 0.25 percentage points to 7.75% per annum. The decision taken is proactive and is aimed at limiting inflationary risks, which remain at an elevated level, especially in the short term. Uncertainty remains regarding the further development of external conditions, as well as the reaction of prices and inflationary expectations to the forthcoming increase in VAT. The increase in the key rate will help prevent inflation from permanently fixing at a level significantly exceeding the Bank of Russia's target. Taking into account the adopted decision, the Bank of Russia forecasts annual inflation in the range of 5, 0-5, 5% by the end of 2019, with a return to 4% in 2020. The Bank of Russia will assess the feasibility of a further increase in the key rate, taking into account the dynamics of inflation and the economy relative to the forecast, as well as taking into account the risks from external conditions and the reaction of financial markets to them.
Inflation dynamics. At the end of 2018, inflation is expected to be close to 4%, which is in line with the Bank of Russia target. In November, the annual growth rate of consumer prices increased to 3.8% (3.9%, as of December 10). The growth in annual inflation in November is mainly associated with an increase from 2.7% to 3.5% in the growth rate of food prices. This was facilitated by a change in the balance of supply and demand in individual food markets. Prices continue to adjust to the weakening of the ruble since the beginning of the year. The upcoming VAT increase from January 1, 2019, is already beginning to affect the growth rate of consumer prices. Most of the inflation indicators characterizing the most stable processes of price dynamics, according to the Bank of Russia, demonstrate growth.
The price expectations of enterprises have increased due to the weakening of the ruble since the beginning of the year and the forthcoming increase in VAT. Household inflationary expectations rose in November. Uncertainty remains regarding their further dynamics.
The situation on the domestic financial market in November - the first half of December remained stable, without creating additional pro-inflationary risks.
According to the forecast of the Bank of Russia, the growth rate of consumer prices will be 3, 9-4, 2% by the end of 2018. Under the influence of the increase in VAT and the weakening of the ruble that occurred in 2018, annual inflation will temporarily accelerate, reaching a maximum in the first half of 2019, and will amount to 5.5% to 5.5% at the end of 2019. The quarterly growth rate of consumer prices in annual terms will slow down to 4% in the second half of 2019. Annual inflation will return to 4% in the first half of 2020, when the effects of the current weakening of the ruble and the increase in VAT have been exhausted. The increase in the key rate is preemptive and will help limit the risks of inflation entrenching at a level significantly exceeding the Bank of Russia's target. The forecast takes into account the decision made by the Bank of Russia to resume regular purchases of foreign currency in the domestic market within the framework of the budget rule from January 15, 2019.
Monetary conditions. Some tightening of monetary conditions continues. OFZ yields remain significantly higher than the levels of the first quarter of this year. There is a further increase in interest rates in the deposit and credit market. The increase in the key rate by the Bank of Russia will help maintain positive real interest rates on deposits, which will support the attractiveness of savings and balanced growth in consumption.
Economic activity. The growth of the Russian economy has slowed down somewhat, remaining close to its potential. The annual GDP growth rate decreased to 1.5% in the third quarter, which is in line with the forecast of the Bank of Russia and is mainly associated with the effect of a high base in agriculture. In October, the annual growth of industrial production continued, its dynamics remains heterogeneous across industries. Consumer demand is growing at a slower pace than in previous months. Its expansion is mainly due to purchases of non-food products. Investment activity continued to grow in the third quarter. The Bank of Russia maintains its forecast for the GDP growth rate in 2018 in the range of 1.5-2%.
The Bank of Russia's outlook on the medium-term growth prospects of the Russian economy has also not changed significantly. Due to the effect of the fiscal rule, a decrease in the average annual oil price in the baseline scenario from USD 63 to USD 55 per barrel in 2019 will have an insignificant effect on the main macroeconomic parameters. In 2019, the planned increase in VAT may have a slight constraining effect on business activity, mainly at the beginning of the year. Additional budget funds received in 2019 will be used to increase government spending, including investment in nature. As a result, according to the forecast of the Bank of Russia, the GDP growth rate in 2019 will be in the range of 1.2-1.7%. In subsequent years, it is possible to increase the rate of economic growth as the planned structural measures are implemented.
Inflation risks. The balance of risks remains shifted towards pro-inflationary risks, especially in the short term. There remains high uncertainty about the further development of external conditions and their impact on the prices of financial assets. Oil prices in the 4th quarter remain above USD 55 per barrel, as predicted for the baseline scenario for 2019-2021. At the same time, the risks of an excess of supply over demand in the oil market in 2019 increased.
Potential capital outflows from emerging markets and geopolitical factors could lead to increased volatility in financial markets and affect exchange rate and inflation expectations.
Uncertainty remains about the reaction of prices and inflationary expectations to the upcoming VAT hike and other pro-inflationary factors.
The Bank of Russia assessment of the risks associated with the dynamics of wages, possible changes in consumer behavior, budget expenditures did not change significantly. These risks remain moderate.
The Bank of Russia will assess the feasibility of a further increase in the key rate, taking into account the dynamics of inflation and the economy relative to the forecast, as well as taking into account the risks from external conditions and the reaction of financial markets to them.
The next meeting of the Board of Directors of the Bank of Russia, which will consider the issue of the key rate level, is scheduled for February 8, 2019. The time of publication of the press release on the decision of the Board of Directors of the Bank of Russia is 13:30 Moscow time.
