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On 22 October 2021, the Bank of Russia Board of Directors decided to increase the key rate by 75 b.p. to 7.50% per annum. Inflation is developing substantially above the Bank of Russia’s forecast and is expected to be within the range of 7.4–7.9% at the end of 2021. The contribution of persistent factors to inflation remains considerable on the back of faster growth in demand relative to output expansion capacity. In this environment, given that inflation expectations are up again, the balance of risks for inflation is markedly tilted to the upside. This may bring about a more sustained deviation of inflation from the target. The Bank of Russia’s monetary policy stance is aimed to limit this risk and return inflation to 4%.

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings. Key rate decisions will take into account actual and expected inflation movements 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. Based on the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will edge down to 4.0–4.5% in 2022 and will remain close to 4% further on.

Inflation movements. Inflation is developing above the Bank of Russia’s July forecast. In September, the paces of monthly seasonally adjusted growth in consumer prices were up markedly. Annual inflation rose to 7.4% (from 6.7% in August). According to an estimate as of 18 October, it went up to 7.8%. Inflation is expected to be within the range of 7.4–7.9% as of the end of 2021.

The acceleration in annual inflation since the second half of August comes in many ways as a result of rising fruit and vegetable prices. However, indicators reflecting the most sustainable price movements appreciably exceed 4% (annualised), Bank of Russia estimates show. This largely reflects the fact that steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors. In this context, businesses find it easier to pass higher costs, including on the back of rising global prices, on to consumers.

At the same time, the impact of one-off supply-side drivers of inflation translates into growing prices for a wider range of goods and services as inflation expectations of households and businesses remain high and unanchored. In October, households’ inflation expectations were up again to a fresh five-year high. Recent data suggest a rise in price expectations of businesses, which are invariably close to multiyear highs. Analysts’ medium-term expectations are anchored close to 4%.

The dominating influence of inflationary factors could lead to a more substantial and prolonged upward deviation of inflation from the target. The Bank of Russia’s monetary policy stance is aimed to limit this risk and return annual inflation to 4%. Under the baseline scenario, annual inflation will edge down to 4.0–4.5% in 2022 and will remain close to 4% further on.

Monetary conditions have not seen any significant changes since the previous meeting of the Bank of Russia Board of Directors. Rising market rates following the increase in the key rate have so far had a limited effect on lending in the context of high inflation expectations.

Yields of short-term OFZs have risen, reflecting expectations for the Bank of Russia to raise the key rate. Yields of medium- and long term OFZs are also up somewhat under the influence of trends in global financial markets. Lending and deposit rates sustain their growth driven by the key rate rises between March and September. Signs have emerged of small inflows of funds into fixed-term ruble deposits. Corporate lending is continuing to grow at rates close to recent years’ highs. Disbursements of mortgage and unsecured consumer loans are still high.  The Bank of Russia’s monetary policy stance will help solidify a trend towards growing appeal of household deposits, protect the purchasing power of savings and ensure balanced expansion in lending.

Economic activity. High-frequency indicators suggest that the economy continued to grow in Q3 albeit at a somewhat slower pace. Based on Bank of Russia estimates, this is largely associated with the return of the Russian economy to a balanced growth path. At the same time, a number of sectors are under increased pressure from supply-side constraints. Their restraining effect on business activity may strengthen against the background of tightened anti-pandemic measures.

Rapid growth in lending, one-off budget payments, rising real wages and households’ low propensity to save, driven by high inflation expectations, support expansion in consumer activity, especially in non-food markets. Growing domestic and external demand and high corporate profits shore up investment activity. A recovery in the services sector is held back by the challenging epidemic situation.

 Moderate inflationary pressure from the labour market persists. Demand for the labour force is growing in many industries. At the same time, many sectors show labour shortages, including due to remaining restrictions on the inflow of foreign labour. The unemployment rate is close to its record lows, with the number of vacancies at its record highs. The state of the labour market suggests that a further increase in steady growth rates of the Russian economy will primarily be conditional on the growth paces of labour productivity.

Taking into account domestic and global economic developments as well as the nature of supply-side constraints, the Bank of Russia expects GDP to grow 4.0–4.5% in 2021. According to the Bank of Russia’s forecast, in 2022–2024, the Russian economy will grow 2.0–3.0% per annum.

Inflation risks. The balance of risks is markedly tilted to the upside. The effect of inflationary factors may be intensified by elevated inflation expectations and accompanying secondary effects.

Further inflationary pressure may come from remaining disruptions in production and logistics chains, staff shortages, as well as structural changes in the labour market as a result of the pandemic. An increase in structural staff shortages may cause labour productivity growth to considerably lag behind wage growth.

Inflationary risks remain to be generated by price movements in global markets. Further changes in food prices will largely depend on the volume and quality of this year’s crops and post-harvest quality preservation both in Russia and abroad.

Short-term inflationary risks are also associated with intensified volatility in global markets caused by, among other factors, a range of geopolitical events, which may affect exchange rate and inflation expectations. Should inflation pressures in the global economy strengthen further, central banks in advanced economies may attempt an earlier normalisation of their monetary policies. This may become an additional source of higher volatility 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, including in the labour market owing to an inflow of foreign labour force.

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, which assumes a return to fiscal rule parameters in 2022. The Bank of Russia’s forecast also takes into account decisions made by the Russian Federation Government to invest the liquid part of the National Wealth Fund.

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings. Key rate decisions will take into account actual and expected inflation movements 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.

In the follow-up to the Board of Directors meeting of 22 October 2021 the Bank of Russia released its medium-term forecast.

The Bank of Russia Board of Directors will hold its next rate review meeting on 17 December 2021. The Board decision press release is to be published at 13:30 Moscow time.

 

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

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Last updated on: 2021-10-22T13:30:00.587