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On 11 June 2021, the Bank of Russia Board of Directors decided to increase the key rate by 50 b.p., to 5.50% per annum. Both the Russian and global economies are recovering faster than expected. Inflation is developing above the Bank of Russia’s forecast. The contribution of persistent factors to inflation is increasing due to faster growth of demand compared to output expansion capacity. Over a short-term horizon, this influence is strengthened by price growth in global commodity markets. Taking into account high inflation expectations, the balance of risks has significantly shifted towards proinflationary ones.

Increased inflationary pressure in the context of the completing economic recovery can lead to a more substantial and prolonged deviation of inflation upward from the target. This creates the necessity of further increases in the key rate at 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. Given the monetary policy stance, annual inflation will return to the Bank of Russia’s target in the second half of 2022 and will remain close to 4% further on.

Inflation dynamics. Inflation is developing above the Bank of Russia’s forecast. In May, seasonally adjusted consumer price growth accelerated significantly, with annual inflation growing to 6.0% (vs 5.5% in April). According to estimates as of 7 June, annual inflation went up to 6.15%.  Based on the Bank of Russia’s estimates, indicators reflecting the most sustainable price movements also rose in May and substantially exceed 4% (annualised).

This largely reflects the fact that steady growth in domestic demand exceeds supply expansion capacity in a wide range of sectors. In this context, businesses find it easier to transfer higher costs to prices.

During the recent months, inflation expectations of households have remained close to their highest level for the last four years. Businesses’ price expectations continue to grow, holding above the local highs of 2019–2020. Analysts’ medium-term expectations are anchored close to 4%.

Given the monetary policy stance, annual inflation will return to the Bank of Russia’s target in the second half of 2022 and will remain close to 4% further on.

Monetary conditions remain accommodative given elevated inflation expectations and actual inflation. In this context, lending continues to grow at rates close to recent years’ highs. At the same time, yields of short-term OFZs rose, reflecting the expectations of a faster-than-expected key rate hike by the Bank of Russia. A trend towards growth in deposit interest rates is also emerging. The Bank of Russia’s decisions to increase the key rate and the rise in OFZ yields observed since the beginning of the year will create prerequisites for further growth in loan and deposit rates. This will make it possible to raise the attractiveness of bank deposits for households, protect the purchasing power of savings, and ensure balanced lending expansion.

Economic activity is recovering faster than expected by the Bank of Russia. High-frequency indicators point to steady growth of consumer and investment demand. According to the Bank of Russia’s estimates, consumer activity has generally reached its pre-pandemic levels. The household services sector continues to recover actively. The Bank of Russia estimates that output has exceeded its pre-pandemic levels in most sectors of the economy. Demand for labour force is growing in a wide range of industries, with certain sectors experiencing a deficit.

The Russian economy is also supported by external demand. The prospects for global economic recovery are improving amid gradual normalisation of epidemic conditions in the world. In turn, this drives prices in global commodity markets higher.

Bank of Russia estimates suggest that in these conditions the Russian economy will recover to pre-crisis levels as soon as 2021 Q2. The medium-term path of economic growth will largely depend both on domestic and external conditions. Domestic demand movements will be predominantly shaped by the rate of growth in consumer and investment demand. Consumer demand will be supported by a further decline in households’ propensity to save along with an increase in incomes and lending. Domestic demand will also be influenced by the process of fiscal policy normalisation in view of the announced additional social and infrastructural measures. External demand movements will be mostly dependent on fiscal support measures in individual advanced economies as well as the pace of vaccination world-wide.

Inflation risks. The balance of risks has significantly shifted towards proinflationary ones. Their effect could be strengthened by elevated inflation expectations and corresponding secondary effects.

Inflationary pressures may originate from a stronger-than-expected decline in households’ propensity to save, propelled by the combination of low interest rates and growing prices. Further upward pressure on prices may continue to come from remaining disruptions in production and supply chains. Proinflationary risks are further generated by price movements in global commodity markers, driven by both supply and demand factors. This may pass through to domestic prices for corresponding goods. At the same time, further movements of food prices will largely depend on agricultural harvest prospects both in Russia and abroad.

Short-term proinflationary risks are also associated with the stronger volatility in global markets caused in part by various geopolitical developments, which may affect exchange rate and inflation expectations. Also, given that the global economic recovery is progressing at faster paces than previously expected and the need is no longer in place for unprecedentedly accommodative policies in advanced economies, an earlier monetary policy normalisation in these countries is possible. This may become a further driver of volatility growth in global financial markets.

Disinflationary risks for the baseline scenario remain moderate. Opening up the borders concurrently with a gradual lifting of restrictions may lead to a recovery in the consumption of foreign services and weaken supply-side constraints in the labour market owing to an inflow of foreign labour force. Subsequent economic growth may be held back by, among other things, low vaccination rates and the spread of new coronavirus strains, as well as the ensuing tightening of restrictions.

Medium-term inflation is largely influenced by fiscal policy. In its baseline scenario, the Bank of Russia proceeds from the fiscal policy normalisation path stipulated by the Guidelines for Fiscal, Tax and Customs and Tariff Policy for 2021 and the 2022–2023 Planning Period, which assumes a return to fiscal rule parameters in 2022. The Bank of Russia’ forecast will also factor in the impact of the decisions to invest the liquid part of the National Wealth Fund in excess of the threshold level of 7% of GDP.

Increased inflationary pressure in the context of the completing economic recovery can lead to a more substantial and prolonged deviation of inflation upward from the target. This creates the necessity of further increases in the key rate at the 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.

The Bank of Russia Board of Directors will hold its next rate review meeting on 23 July 2021. The press release on the Bank of Russia Board decision and the Bank of Russia’s medium-term forecast are to be published at 13:30 Moscow time.

 

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 11 June 2021

The reference to the Press Service is mandatory if you intend to use this material.

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Last updated on: 2021-06-11T13:30:00.620