JULY 2021

Monetary Policy Report

The key rate
has been raised by 100 bp

The inflation forecast for the year-end 2021 has been revised upwards by 1 pp

If the situation develops in line
with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increase at its upcoming meetings.

Inflationary pressure
remains elevated

Inflation (% YoY) and the Bank of Russia key rate (% p.a.)

Annual inflation significantly exceeds the target (6.5% in June). Current high growth rates are driven by both steady and temporary factors. In many industries, expanding demand exceeds their capacity to ramp up output and imports. Rising inflation is coupled with elevated inflation expectations, which involves risks of secondary effects for inflation.

The forecast of annual inflation for 2021 has been increased considerably – to 5.7–6.2%. July’s decision to raise the key rate by 100 bp will limit the deviation of inflation upwards from the target and will help bring it back to 4%. Given the current monetary policy stance, annual inflation will lower to 4.0–4.5% in 2022 and stay close to 4% further on.

Economic growth sped up in Q2;
the Bank of Russia estimates that the economy has returned
to pre-crisis levels

GDP growth rate, % YoY

Industrial sectors accounting for nearly two-thirds of industrial output have already exceeded pre-crisis levels, and this upward trend continues. Oil production, international air transportation, hotels, and restaurants have not yet recovered completely.

The Bank of Russia has raised its 2021 GDP growth forecast to 4.0–4.5%. This forecast takes into account the OPEC+ deal and rising domestic demand, including both consumer and investment demand. In 2022–2023, the economy will expand at a pace close to its potential (2–3%).

The Bank of Russia’s monetary policy will not constrain the steady rates of economic growth.

Monetary conditions have been
progressively adjusting to the earlier decisions, but are still accommodative

OFZ yields and the Bank of Russia key rate, % p.a.

Monetary conditions have not yet adjusted completely to the earlier key rate decisions.

The yield curve of federal government bonds (OFZ) has significantly increased for maturities of up to five years. The rise in short- and medium-term yields reflects both the Bank of Russia’s decisions and market expectations regarding the future key rate path. Shifts in long-term yields are minor. Among other things, this is evidence of market participants’ confidence that monetary policy will finally bring inflation back to the target.

As compared to OFZ yields, interest rates on loans and deposits have responded more slowly and risen less significantly. Growth in retail and corporate lending is close to its highest rates recorded in recent years. The lending growth forecast for 2021 has been revised upwards. Mortgage lending will continue to expand fast, while slightly decelerating given the amendments to the subsidised mortgage lending programme effective since 1 July 2021.

The balance of risks is largely shifted towards proinflationary ones

Proinflationary risks remain the most serious challenge. The main risk is a potential anchoring of inflation expectations at a high level. There is a slight increase in risks associated with a possible faster normalisation of monetary policies in advanced economies. As a result, market volatility in emerging market economies might intensify, which can affect exchange rate and inflation expectations.

Another group of risks is associated with structural changes in the labour market, specifically local staff shortages caused by the pandemic. Due to the situation in the labour market, wages might rise faster than labour productivity. Proinflationary risks associated with the environment in global commodity markets also persist, although they have slightly lowered in recent months.

Disinflationary risks for the baseline scenario are much weaker.

Bringing inflation back to the target requires a higher key rate path in 2021-2022

Average-for-the-year key rate and its forecast, % p.a.

As inflationary pressure has turned out to be higher and more persistent than predicted in April, the forecast of the average key rate has been revised upwards. According to the baseline forecast, inflation will return to the target over the forecast horizon if the key rate averages 6.5–7.1% from 26 July to the end of 2021 and 6.0–7.0% in 2022. The Bank of Russia forecasts that the average key rate for the year 2023 will range from 5.0% to 6.0% p.a., which is in line with the Bank of Russia’s estimate of the longer-run neutral key rate.


If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increase at its upcoming meetings. Key rate decisions will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.