Russia Lowers Key Rate By 25 Bps

Russia's central bank decided to cut its key rate by a quarter point, amid below-target inflation, and signaled more reduction this year.

The Board of Directors of the Bank of Russia trimmed the key rate to 7.25 percent from 7.50 percent. The bank had lowered the rate by 25 basis points in February.

The bank said it will continue to reduce the key rate and complete the transition to a neutral monetary policy in 2018 as inflation remains below 4 percent for a longer time than previously estimated. Inflationary expectations are gradually decreasing, the bank observed. Annual inflation is expected to be 3-4 percent at the end of 2018 and close to 4 percent in 2019.

The gradual return of inflation to the target will contribute to the further recovery of domestic demand, the bank said.

"The decision made at the key rate and the potential for its subsequent reduction will further mitigate monetary conditions, which will support the growth of domestic demand and create conditions for annual inflation to approach 4 percent," the bank said.

Policymakers said they will pay special attention to the situation in the labor market, including assessing the impact of income and wage dynamics on consumer behavior and inflation.

The GDP growth rate is forecast to be in the range of 1.5-2 percent in 2018-2020, which corresponds to the potential rates of economic growth.

The policy rate will be lowered to 6.00 percent by the end of this year, which is a little lower than the markets are pricing in, William Jackson, an economist at Capital Economics, said.