The Board of Directors of the Bank of Russia decided to raise its key interest rate to 9.5% per annum

The Board of Directors of the Bank of Russia October 31, 2014 decided to raise its key interest rate to 9.50% per annum. In September and October, the external conditions have changed significantly: oil prices have dropped significantly, while there was tougher sanctions imposed by individual countries, in respect of a number of large Russian companies. In these conditions, the weakening of the ruble, which along with the introduction in August of restrictions on import of certain food products led to a further acceleration of growth in consumer prices. According to the Bank of Russia, before the end of I quarter of 2015, inflation will stay above 8%. Continued high growth in consumer prices for a long time leads to an increase in inflation expectations, which creates additional inflationary risks. The Bank of Russia will continue to take measures aimed at slowing the growth of consumer prices to the target level of 4% in the medium term. In the case of external conditions improve, the formation of a stable downward trend in inflation and inflation expectations the Bank of Russia will be ready to begin easing monetary policy.

In September and October, inflation increased at a faster pace than previously expected. According to the October 27, the annual growth rate of consumer prices was 8.4%. Core inflation in September 2014 increased to 8.2%. The increase in inflation was mainly due to the acceleration of growth in prices of food products: from 10.3% in August to 11.4% in September. The growth rate of prices for industrial goods remained stable at 5.5%. The main impact on the dynamics of inflation had a weakening of the ruble and foreign trade restrictions imposed in August 2014. According to the Bank of Russia, the total contribution of these factors in the annual growth rate of consumer prices for the year will be about 2.5 percentage points (of which 1.2 percentage points - the contribution of foreign trade restrictions imposed in August, 1.3 percentage points - the contribution of weakening of the ruble since the beginning of the year). Against the background of accelerating the growth of consumer price inflation expectations of the population and the business continued to grow, which puts additional pressure on prices.

What happened tightening of monetary conditions is not yet offset the effects of the above factors on inflation expectations. Nevertheless, the dynamics of monetary aggregates creates prerequisites for reducing inflation in the medium term. According to the October 1, 2014, the annual growth rate of money supply (M2) was 7.4% compared to 16.1% as of the same date last year. Growth rates on household deposits continued, that will support the propensity to save and create conditions for the flow of cash in bank deposits. Against the background of rising interest rates on loans and the banks' claims to the quality of borrowers and ensure there is a slowdown in lending to the economy (adjusted for currency revaluation).

According to the Bank of Russia, the annual rate of GDP growth in the III quarter of 2014 was 0.2%. The economic slowdown has not yet expressed a deterrent effect on consumer price inflation, as is largely due to structural reasons. Load factors of production - labor and competitive production facilities - at a high level. In this case, productivity is growing slowly. Due to long-term demographic trends observed decline in labor supply. In addition to structural factors, the negative impact on economic activity has increased foreign policy uncertainty. In the context of the limited availability of long-term financial resources and more stringent requirements for the quality of borrowers by Russian banks investments in fixed assets reduced. Thus there is a cooling of consumer demand as slower growth in real wages and retail lending. External economic conditions have a moderating influence on the Russian economy: there is a significant decline in oil prices, while economic activity in most countries - Russia's trading partners remains weak. However, support for individual sectors of the economy and exchange rate dynamics has restrictions on imports of certain food products. According to the Bank of Russia, in the IV quarter 2014 and I quarter of 2015 economic growth will be close to zero.

The growth rate of consumer prices with a high probability will continue until the end of the I quarter of 2015 close to the current values that will be caused by the preservation of a significant impact on the price restrictions on imports of certain food products and the weakening of the ruble in August and October 2014. Subsequently, as the gradual adaptation of the economy to foreign trade restrictions and exhaustion influence exchange rate dynamics on prices is expected to resume reduce inflation and inflation expectations. Slower growth in consumer prices will also contribute to low aggregate demand while maintaining the total output of goods and services below potential. However, the decline in inflation will be at a slower pace than previously expected. The Bank of Russia will continue to take measures aimed at stabilizing inflation expectations and a slowdown in consumer prices to the target level in the medium term. In the case of external conditions improve, the formation of a stable downward trend in inflation and inflation expectations the Bank of Russia will be ready to begin easing monetary policy.

The next meeting of the Board of Directors of the Bank of Russia, which will address the issue of the level of the key rate, scheduled for December 11, 2014. The time of publication of the press release on the decision of the Board of Directors of the Bank of Russia - 13:30 Moscow time.