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On 16 September 2022, the Bank of Russia Board of Directors decided to cut the key rate by 50 basis points to 7.50% per annum. Current consumer price growth rates remain low, contributing to a further slowdown in annual inflation. This is due to both the influence of a set of one-off factors and subdued consumer demand. Developments in business activity are better than the Bank of Russia expected in July. However, the external environment for the Russian economy remains challenging, invariably putting significant constrains on economic activity. Inflation expectations of households and price expectations of businesses remain elevated.

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. According to the Bank of Russia’s forecast, annual inflation will total 11.0-13.0% in 2022 and, given the monetary policy stance, drop to 5.0–7.0% in 2023, returning to 4% in 2024.

Inflation movements. Current consumer price growth rates remain low, contributing to a further slowdown in annual inflation. Annual inflation declined in August to 14.3% (after 15.1% in July); according to a 9 September estimate, it is down to 14.1%.

The decline in headline inflation is largely due to continued adjustment of prices for goods and services, after they went up sharply in March. This was supported by the dynamics of the ruble exchange rate and generally subdued consumer demand. An additional disinflationary factor was the expansion of supply in a number of goods markets as external and domestic export restrictions remained in place. However, the overall consumer price index in August, on a monthly seasonally adjusted basis, was decelerating slower, and core inflation went up slightly.

Inflation expectations of households and businesses remain elevated. Analysts’ medium-term inflation expectations are anchored close to 4%.

Taking into account emerging trends in consumer prices, the Bank of Russia expects annual inflation to decline to 11.0-13.0% by the end of 2022. Annual inflation will continue to decline under the influence of base effects, among other things, despite the expected further increase in current rates of price growth. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will decline to 5.0–7.0% in 2023 and return to 4% in 2024.

Monetary conditions continued to ease, and the Bank of Russia views them as overall neutral. Following the July decline in the key rate, yields on short- and medium-term OFZs decreased. Yields on long-term OFZs did not change significantly. There was a further drop in loan and deposit, especially short-term, rates.

Despite the recent reduction in deposit rates, the inflow of household funds to credit institutions was overall continued. Household funds were placed into long-term ruble deposits and current accounts, and withdrawn from short-term ruble deposits. This reflects a normalisation in the structure of household savings with banks.

Growth in corporate lending accelerated. A recovery was seen in unsecured consumer lending, alongside with significant growth in mortgage loans. Credit activity was supported by both government subsidised lending programmes and the key rate reduction that occurred in between April and July.

Economic activity. The external environment for the Russian economy remains challenging and significantly constrains economic activity. Concurrently, Q2 GDP and high-frequency indicators point to stronger dynamics of business activity than the Bank of Russia expected in July. At the same time, trends across sectors and regions remain clearly mixed.

Both demand and supply factors are making a certain negative impact on economic activity. Surveys suggest that a significant proportion of enterprises are still confronted by difficulties in production and logistics. However, their sentiment is continuing to improve as suppliers of finished products, raw materials and components diversify, as do sales markets. A growing number of enterprises are adjusting to the new environment.

For all the recovery, consumer activity remains muted.  This is due to the recent drop in real incomes of households as they maintain their propensity to save. Specifically, the latter factor is explained by, beyond overall economic uncertainty, the reduced supply of several types of goods and services. Having said that, supply-side constraints on consumer markets have slightly faded as consumer imports are gradually recovering and import substitution is taking place.

The situation in the labour market remains stable in general. Although the number of vacancies has decreased, the unemployment rate is near historical lows. The adaptation of the labour market to the changed conditions largely occurs through the mechanism of part-time employment and the adjustment of real wages.

According to the Bank of Russia, with regard to the current situation in the Russian and global economies, the decline in GDP in 2022 may be closer to the upper bound of the July forecast range (-6.0)—(-4.0)%.

Inflation risks. There is a balance between proinflationary and disinflationary risks over a short-term horizon. Over a medium-term horizon, proinflationary risks still prevail.

Risks for the baseline scenario are largely associated with the volatility of the ruble exchange rate, which is indicative of the changes in foreign trade flows, as well as the dynamics of inflation expectations.

The disinflationary effect over a short-term horizon may be caused by the high propensity of households to save in the conditions of general economic uncertainty, the length of adaptation to the new structure of supply in consumer markets, and expectations of a further price downturn against the background of the strengthening of the ruble since the beginning of the year. Concurrently, the pass-through of the latter to prices may be longer. A good harvest of agricultural products in 2022 may be an additional disinflationary factor. An increase in supply in the domestic market of goods which are subject to export restrictions may also produce more pronounced disinflationary effects.

Short-term proinflationary risks are caused by high and unanchored inflation expectations which are particularly sensitive to exchange rate fluctuations, as well as by the acceleration of consumer lending. Growth in consumer lending may be strengthened by the easing of banks’ non-price requirements for borrowers and lower risk premiums in interest rates. If combined, these factors can lead to consumer demand outstripping the capacity to expand output.

A further toughening of external trade and financial restrictions may also create significant proinflationary risks. They can lead to a greater reduction in the Russian economy’s potential than expected in the baseline scenario. Supply-side constraints may in particular strengthen because of problems with the procurement of equipment, a slow replenishment of stocks of finished goods, raw materials and components in the event of intensifying negative trends in import dynamics. In turn, the materialisation of growing risks of a global recession may further weaken external demand for Russian exports and, as a result, provoke a weaker rouble.

The movements of the economy and inflation largely depend on fiscal policy decisions. The Bank of Russia takes into account the decisions already made regarding the mid-term expenditure path of the federal budget and the fiscal system as a whole. In case of a further budget deficit expansion, tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4% further on.

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.

The Bank of Russia Board of Directors will hold its next rate review meeting on 28 October 2022. The press release on the Bank of Russia Board decision and the 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 on 16 September 2022

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