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On 29 April 2022, the Bank of Russia Board of Directors decided to cut the key rate by 300 basis points to 14.00% per annum. The external environment for the Russian economy remains challenging and significantly constrains economic activity. With price and financial stability risks no longer on the rise, conditions have allowed for the key rate reduction. Recent weekly data indicate a slowdown in current price growth rates on the back of a strengthening of the ruble and a cooling of consumer activity. Further inflation movements will be shaped by such impactful factors as the efficiency of import substitution processes and the scale and speed at which imports of finished goods, raw materials and components will be recovering. The Bank of Russia’s monetary policy will take into the account the need for a structural transformation of the economy and will ensure a return of inflation to target in 2024.

Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic transformation processes, as well as risks posed by domestic and external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia sees room for key rate reduction in 2022. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will reach 18.0–23.0% in 2022, slowing down to 5.0–7.0% in 2023 and returning to 4% in 2024.

Inflation movements. Although still high, current growth rates of consumer prices have slowed significantly after they peaked in the first half of March. The slowdown in inflation comes largely on the back of a stronger ruble and a cooling of consumer activity. In this context, April saw a decline in inflation expectations of households and businesses. Further inflation movements will be shaped by such impactful factors as the efficiency of import substitution processes and the scale and speed at which imports of finished goods, raw materials and components will be recovering.

As of 22 April, annual inflation was 17.6% (vs 16.7% in March). In the baseline scenario, the Bank of Russia expects annual inflation to continue to increase in the coming months, due to the base effect, to total 18.0–23.0% in 2022. The Bank of Russia’s monetary policy will take into the account the need for a structural transformation of the economy and will ensure a return of inflation to target in 2024. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will slow down to 5.0–7.0% in 2023 to return to 4% in 2024.

A sharp tightening in monetary conditions in the first half of March has given way to their softening in several segments of the financial market. OFZ yields have decreased. Deposit rates are declining at an outrunning pace. At the same time, a growing risk premium factored into lending rates and more stringent borrower requirements of banks trigger the emergence of tight price and non-price bank lending conditions. Against this background, lending activity is decreasing, especially in the retail lending market.

Today’s decision of the Bank of Russia along with current preferential lending programmes of the Government will support the availability of credit resources in the economy and limit the scale of decline in economic activity. However, the disinflationary impact of monetary policy will remain in place.

Based on Bank of Russia estimates, economic activity began to decline in March 2022. High-frequency indicators point to a contraction in consumer and business activity. After a temporary surge, consumer demand is decreasing in real terms, accompanied by a rise in households’ propensity to save. The decline in imports due to the introduction of external trade and financial restrictions is outstripping the decline in exports. Despite the gradual change in the country and commodity structure of exports and imports as new suppliers and sales markets emerge, businesses are experiencing considerable difficulties in production and logistics.

According to the Bank of Russia’s baseline forecast, GDP will reduce by 8.0–10.0% in 2022. The decrease will be mainly driven by supply-side factors. In 2023, the Russian economy will begin growing gradually amid a structural transformation. In 2023 Q4, output will be up by 4.0–5.5% on the same period in 2022. However, the overall GDP change in 2023 will be within the range of (-3.0)—0.0% due to the base effect of 2022 Q1. In 2024, GDP will increase by 2.5–3.5%.

Inflation risks. Though having decreased slightly, proinflationary risks are still considerable. They are primarily associated with a further exacerbation of external trade and financial restrictions. The decline in the potential of Russia’s economy driven by restrictions may turn out to be more pronounced than the baseline scenario assumes. Over a short-term horizon, the effect of proinflationary factors is likely to be accentuated by high and unanchored inflation expectations.

Disinflationary risks to the baseline scenario are mostly linked to the possible additional tightening of monetary conditions in the economy due to a consistently high risk premium in credit rates and elevated banks’ requirements for borrowers amid high uncertainty. This may in aggregate lead to a greater slowdown in lending.

Ruble exchange rate dynamics will remain a meaningful factor shaping the path of inflation and inflation expectations.

The movements of the economy and inflation will also depend on future fiscal policy decisions. The Bank of Russia’s baseline scenario rests on the decisions already made regarding the mid-term expenditure path of the federal budget and the fiscal system as a whole. Additional decisions changing fiscal policy parameters may influence the mid-term path of the key rate.

Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic transformation processes, as well as risks posed by domestic and external conditions and the reaction of financial markets. If the situation develops in line with the baseline forecast, the Bank of Russia sees room for key rate reduction in 2022.

In the follow-up to the Board of Directors meeting of 29 April 2022 the Bank of Russia released its medium-term forecast.

The Bank of Russia Board of Directors will hold its next rate review meeting on 10 June 2022. The Board decision press release is to be published at 13:30 Moscow time.

 

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 29 April 2022

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Last updated on: 2022-04-29T13:30:00.520