In its most recent monetary policy report, the Bank of Russia laid out its updated outlook for the Russian economy, including its latest forecasts for oil prices. The bank admits that economic conditions in Russia have continued to deteriorate since its last report.
Rate Hike
According to the report, many Russian companies have shown increased demand for foreign currencies in recent months, which has led to continued deterioration of the ruble. In addition, accelerating inflation expectations, household demand for foreign currency and dollarization have all recently become serious concerns for the Bank of Russia.
Increasing threats of rapid consumer price growth led the Bank of Russia to raise its key rate from 10.5 percent to 17.0 percent at an unscheduled meeting of the board of directors in December.
Shifting Focus
This rate hike temporarily provided stability to depreciation and inflation expectations. So far in 2015, the focus has shifted to reducing the key rate as inflation risks weaken. The Bank of Russia has cut the key rate twice in 2015 (by a total of 3 percent) to its current level of 14 percent. The bank plans to reduce the key rate further as inflation risks continue to fall.
Oil Playing A Central Role
The Bank of Russia report indicates that falling oil prices have played a major role in the recent economic weakness in Russia. However, the bank is calling for a significant recovery in crude oil prices by 2017. Currently, the Bank of Russia is forecasting $50-$55 per barrel for 2015, $60-$65 per barrel for 2016 and $70-$75 per barrel by 2017.
The Bank of Russia is predicting 5.5-6.3 percent GDP growth rate for Russia in 2017.
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