Russia: (Even) lower inflation, lower interest rates

The Bank of Russia (CBR) has just announced the Board decision to cut its key rate by 25bp, from 7.75% to 7.50%. The move was broadly anticipated, although following the January inflation print, some market analysts had called for a 50bp rate cut. Inflation dropped to a new historical low of 2.2% YoY in January from 2.5% in December, delivering another surprise to the CBR which had been calling for the disinflationary trend to reverse since at least September.

Inflation and CBR key rate

Inflation and CBR key rate
Source: Rosstat, CBR

 

In the statement accompanying today’s decision the CBR made some notable changes compared to several previous meetings. It acknowledged that inflation will remain low at least throughout H1 2018 and that the risk of not meeting the 4% inflation target this year had become low. Taking this into account, the CBR would make a (temporary) shift of its policy focus from inflation to supporting growth. The latter would be implemented by further rate cuts. While reiterating the pledge for policy softening, the CBR announced the intention to complete the transition to a “neutral” policy stance faster, by the end of the year. In numbers, this translates to the key rate reaching 6.0-6.5% by December.

For the real estate sector, the main implications are as follows. Consistently low inflation – well below the CBR 4% target – will support the consumer. Demand from retail and warehouse tenants should reflect this in the near future.

The trend of declining key rate will continue pushing loan – and deposit – rates lower. As the new construction cycle starts, this factor will help it to gain the traction earlier and faster. Although (a) still high vacancies, and (b) values still below construction costs will likely leave the developers in a cautious mood, keeping the new supply at moderate levels.

About the Author

Vladimir is a recognized expert with over 20 years of experience in research in macroeconomics, capital markets, investment, and real estate. Vladimir has joined JLL in April 2016, where he has held the Head of Research position in 2007-2010, before leaving to take up the role of Chief Economist, Russia & CIS at Barclays Capital. Most recently, Vladimir worked at Sberbank CIB as Senior Strategist. From 2003-2005 he has led the Research department at Rosbank and then was a Chief Economist at Renaissance Capital. Vladimir has received several prestigious awards and nominations. He has been voted the best economist in the Institutional Investor All Russia Research Team survey, the ‘Best Russian Real Estate Analyst’ by the Euromoney Real Estate Awards, and has been a member of the top-ranked research teams in Eleonora Surveys. He holds a BA in Mathematical Economics from Moscow State University, a MA in International and Development Economics from Yale University and a PhD in Economics from Duke University.

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