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On 16 December 2022, the Bank of Russia Board of Directors decided to keep the key rate at 7.50% per annum. Current consumer prices are growing at a moderate rate, and consumer demand is subdued. Inflation expectations of households and businesses, essentially unchanged, remain elevated. At the same time, pro-inflation risks are up and prevail over disinflationary risks. This comes as a result of rising inflation pressures from the labour market, worsening foreign trade conditions and a softer fiscal stance.

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, given the monetary policy stance, annual inflation will decline to 5.0–7.0% in 2023 to return to 4% in 2024.

Inflation movements. In November, the annual growth rate of consumer prices was 12.0% (vs 12.6% in October). According to 12 December data, annual inflation is up to 12.7%, which takes into account the earlier indexation of utility rates (formerly planned for July 2023).

Annual inflation has significantly declined since it peaked in the spring. It still mainly reflects the effects of the sharp surge in prices that occurred between February and April 2022. At present, inflationary pressures are overall moderate. However, the current rate of price growth is up slightly, in part due to steady components of inflation.

Despite the relatively low price growth rates in the previous months, inflation expectations of households and price expectations of businesses are high. Concurrently, price expectations of businesses have shown some growth since late summer. Analysts’ medium-term inflation expectations are anchored close to 4%.

According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will decline to 5.0–7.0% in 2023, return to 4% in 2024 and stabilise close to 4% further on.

Monetary conditions have remained overall neutral. OFZ yields are essentially unchanged since the end of October. Deposit and loan rates have been gradually adjusting to the September upward movement in the OFZ curve.

At the same time, credit activity has remained high, especially in the corporate sector. Flash estimates indicate a recovery in retail lending following a temporary slowdown in October, in large measure on the back of stabilisation in consumer sentiment.

In the context of growing deposit rates since late September, credit institutions have recorded a resumed inflow of household funds, although chiefly to current accounts. Despite increased inflation expectations, consumer behaviour is overall cautious. This is reflected in the high propensity to save and the increased share of liquid assets (current accounts and ruble cash) in the savings structure.

Economic activity. The external environment for the Russian economy remains challenging and significantly constrains economic activity. This relates in particular to the logistics problems that still exist in many industries. However, high-frequency indicators suggest some growth in business activity in the fourth quarter.

At present, the capacity to expand production in the Russian economy is largely limited by the labour market conditions. Unemployment has dropped to a record low. Labour shortages are increasing in many industries amid the effects of the partial mobilisation. Under these conditions, real wage growth is accelerating in these sectors and could outpace productivity growth.

During the transformation of the economy, a change in the structure of aggregate demand is taking place. Consumer demand remains subdued. Investment demand in the private sector is slowing down amid growing government investment. Overall, the contribution of fiscal policy to the dynamics of domestic demand is increasing.  The additional fiscal easing announced by the Government will support economic activity in 2023.

Inflation risks. The medium-term balance of risks remains tilted towards pro-inflation risks. Short-term pro-inflation risks have increased and also prevail over disinflationary risks.

A slowdown in the global economy could weaken foreign demand for Russian exports and have a pro-inflation effect via a weaker ruble. In turn, a further escalation of external trade and financial restrictions, fragmentation of the global economy and the financial system could lead to a sharper decline in the Russian economy’s potential than expected in the baseline scenario, which is also a significant pro-inflation risk. Specifically, supply-side constraints may increase due to problems with the supply of equipment, slowly replenishing stocks of finished products, raw materials and components in the event of an escalation of negative trends in imports.

As for domestic conditions, pro-inflation effects may be more pronounced than in the baseline scenario due to a reduction in the labour force and a change in the employment structure. Another source of pro-inflation risk could be accelerated growth in real wages that exceeds productivity growth. High and unanchored inflation expectations, which are particularly sensitive to exchange rate fluctuations, are also a source of risk. Under these conditions, the growth of the most liquid assets in the structure of household savings may spur increased consumer demand in the future.

A significant disinflationary risk for the baseline scenario is the continued high propensity of households to save amid increased general uncertainty, as well as households’ protracted adaptation to a new supply structure in consumer markets. A growing risk premium in bond yields and lending rates could additionally tighten monetary conditions, which could restrain lending in the economy. A more rapid adaptation of the economy, accompanied by an active recovery of imports among other things may also have a disinflationary effect. In the coming months, the disinflationary effects of increased supply in certain food markets may also become more pronounced.

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 key rate review meeting on 10 February 2023. 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 December 2022

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