Monetary Policy Report

Annual inflation accelerated to 5.8% in March. Faster price growth is caused not only by the pass-through of higher production costs, but also by the stronger impact of the steady component of price dynamics. According to the Bank of Russia’s estimate, this growth reflects the monetary nature of inflation.

Annual inflation will plateau close to Q1 values until the middle of the year.  Inflation forecast for the end of 2021 has been raised to 4.7–5.2%. The forecast was revised upwards mainly due to the dynamics of demand which is recovering much faster than expected in February. Inflation will return to the target close to 4% in mid-2022 and remain there further on. 

Taking into account the Q1 high-frequency data and the active recovery of consumer demand, the Bank of Russia keeps unchanged its 2021 GDP growth forecast at 3–4%. The economy is set to return to its pre-pandemic level as early as 2021 H2.

Most sectors have recovered completely. The rise in all other sectors is only constrained by the remaining restrictions largely associated with the pandemic. In certain sectors, the potential for output expansion is lagging behind the expanding demand, including due to lack of labour force.

Accommodative monetary policy has fully played its countercyclical role, supporting the economy at the acute stage of the crisis.

OFZ yields stabilised in April after growing in February and March. The growth of yields at the short end of the curve was mostly caused by changes in expectations with respect to the Bank of Russia’s monetary policy. In April, monetary policy approached the accommodative and neutral threshold. Medium- and long-term OFZ yields were predominantly influenced by the rise in interest rates in global financial markets as well as a range of geopolitical factors.

Accommodative monetary conditions support high growth rates of lending to the economy. The Bank of Russia forecasts that corporate lending will expand by 8–12% this year. Mortgage lending will grow at higher paces of 16–20%.

The key rate hike will support growth of deposit interest rates and slow down inflation, which will help protect household funds from depreciating.

Over the medium-term horizon, risks are mainly proinflationary. They are related largely to increased inflation expectations. As inflationary pressure is stronger and supply-side factors exert additional influence on price growth, inflation expectations may stay elevated for longer time. Consequently, the saving ratio may decline faster, with consumer activity rising above expectations.

There are also disinflationary risks, yet the probability of their materialisation is lower. They are mostly associated with the fact that demand growth may turn out to be below our expectations. These risks can also include a faster reopening of borders and the potential emergence of new coronavirus strains.

If the situation develops not in line with our baseline scenario, we will be responding so as to bring inflation back close to 4% over the forecast horizon.

The Bank of Russia has started publishing its forecast of the average key rate for the year. This forecast will be updated four times a year along with other parameters of the medium-term macroeconomic forecast.

In the baseline forecast, the return of inflation to the target by mid-2022 is based on the average key rate for the year of 4.8–5.4% p.a. in 2021 and 5.3–6.3% p.a. in 2022. The Bank of Russia forecasts the average key rate for the year in the range of 5.0–6.0% p.a. in 2023, which corresponds to the estimated longer-run neutral rate range. At the same time, in the course of the year, the key rate may be above and as well as below its average for the year.