CBR to continue cutting key rate once sure of sustainable inflation slowdown, still cautious for now - advisor
CHEBOKSARY. June 27 (Interfax) - The Central Bank of Russia (CBR) is still maintaining a cautious approach toward easing monetary policy and will continue to lower its key interest rate once it is sure of the sustainability of the downward trend in inflation, but for now it still sees risks in the dynamic of prices, the advisor to the CBR governor, Kirill Tremasov said.
"There are still external risks, still internal risks. The situation is complicated and at upcoming meetings we will continue to assess the situation in the economy in terms of the balance of risks. We will look, foremost analyse the sustainability of the downward trend in inflation. The slowdown of inflation is evident, this trend appears to be the case, no doubt, but the sustainability of this trend, we have yet to be convinced of this. Having made sure of this, we will be prepared to lower the rate. At this point we see fairly big risks here," Tremasov said at the Cheboksary Economic Forum.
The CBR cut its key rate by 100 basis points to 20% in June, despite the expectations of most market participants.
"Yes, we lowered the rate at the June meeting, but we are still looking very cautiously at the future trajectory of the key rate," Tremasov said.
The forecast for the average key rate for 2025, which is 19.5%-21.5%, presumes that the "rate might decrease a few points further by the end of the year," he said.
"But only if everything develops in line with our baseline forecast, if some sort of black swans don't fly in, some sort of new shocks don't occur, if the economy does not face some sort of new shocks. That which is always unpredictable, naturally we can't factor such events into the forecast. Pro-inflationary risks, we note, are still quite high," Tremasov said.
He noted the risk from the labor market, stressing that there are no large countries in the world with such low unemployment as Russia.
"Unemployment of 2% is essentially the complete absence of available hands. Such a situation with staffing pushes wage growth upward. On one hand, of course, we're all happy that our incomes are growing. But on the other hand, any entrepreneur, if he is forced to raise wages at his business at rates that are faster than the growth of productivity, such a business will fail sooner or later. In other words, wage growth should always correspond to growth of labor productivity, otherwise such a business will not be able to exist for long," Tremasov said.
Wage growth that exceeds the growth of productivity is a major pro-inflationary factor that pushes up prices through the country, he said.
"We continue to remain in a situation with an overheated labor market and this is probably one of the important risks that forces use to be very cautious about the current situation," Tremasov said.
There are also high risks from the global economy, he said. "The trade wars that the new American administration has started bring risks of a slowdown of the global economy," Tremasov said, acknowledging that this factor is not yet very evident in global statistics.
If there is a new escalation of trade wars, this could slow global economic growth, reduce commodity prices and bring pro-inflationary risks for Russia, he said.
