The ruble’s strengthening since the beginning of the year made an additional contribution to inflation slowdown. Higher oil prices and overall favourable conditions in financial markets helped. International investors’ interest in Russian assets recovered, which was the most distinctive in the OFZ market. The agreements on retail fuel prices between the Russian Government and oil majors are continuing to play a significant role. Consumer petrol prices rose in May by 2.8% year on year, and their growth is likely to be moderate in the near future. That said, the new regulation in this market, in particular, the offsetting mechanisms (including reverse excise duties), is rather complicated. Currently, it is hard to accurately estimate its medium-term economic effectiveness, especially for scenarios providing for tangible oil price fluctuations. Moderate domestic demand is also curbing inflation. This calls for a deeper insight into the economy. This is the second most important factor that we took into account. Economic growth in the first half of the year has been lower than expected. We predicted that business activity might slow down somewhat at the beginning of the year on the back of the following factors: the VAT hike, a likely slowdown in growth of the global economy and demand for Russian goods and services, and the implementation period of the major national projects scheduled for the second half of the year. Some of these factors had a stronger effect than expected. In particular, budget expenditure dynamics.
As regards monthly growth in prices of non-food goods and services, it held close to or below 4% in annual terms in March-May. Fourth. We factored in that inflation expectations of households and businesses remain elevated against both the inflation target and the minimum levels reached in the opening months of 2018. Inflation expectations show mixed dynamics. Business price expectations continued to decline in April-May. Inflation expectations of households came in at 9.3-9.4% during this period. However, we expect that inflation decline to 4% will bring down inflation expectations of households and businesses. Analysts’ expectations remain anchored at the inflation target of close to 4%. Fifth. Monetary conditions are softening. This is driven by changing expectations of domestic and external financial market players. First, this is enabled by revised expectations as to the path of the Bank of Russia key rate; second, by an adjustment in expectations and yields in the external financial market against the background of changes in major central banks’ rhetoric – which I have mentioned. OFZ yields are declining in this environment, enabling a potential reduction in deposit and lending rates. Between April and May, a number of major banks revised downwards their interest rates on several deposit products; interest rates on mortgage loans were also beginning to trend down. Today’s decision to cut the key rate alongside the signal we have sent out will work to solidify these trends. Medium-term outlook. The outcome of OPEC+ negotiations remains uncertain.