On 28 April 2023, the Bank of Russia Board of Directors decided to keep the key rate at 7.50% per annum. Current rates of price growth have increased since late 2022 but remain moderate, including in the stable components of inflation. Inflation expectations of households are down. They nevertheless remain elevated, as do businesses’ price expectations. Economic activity is rising faster than the February forecast of the Bank of Russia assumed. This reflects both an expansion in domestic demand and the ongoing processes of transformation of the Russian economy. Accelerating fiscal spending, deteriorating terms of foreign trade and the situation in the labour market continue to pose pro-inflation risks. The overall balance of inflation risks has remained essentially the same since the previous Board meeting.
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 the risks posed by domestic and external conditions and the reaction of financial markets. Given gradually rising inflationary pressures, the Bank of Russia’s forthcoming Board meetings will consider the necessity of key rate increase to stabilise inflation close to 4% in 2024 and further on. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will come in at
Inflation movements. Annual inflation is down significantly from the high base; it was 3.5% in March (after 11.0% in February) and 2.5% as of 24 April. Current rates of price growth have increased since late 2022 and are largely about 4% on an annualised basis. Bank of Russia data show that the stable components of current price growth are so far below 4% on an annualised basis.
The increase in current price growth rates was held back by a number of factors. On the one hand, they included an ongoing adjustment of the Russian economy to external trade and financial constraints. On the other hand, among them was a high level of inventories in a number of goods groups and essentially moderate consumer demand. Over this background, the weakening of the ruble since late 2022 has so far little shown in price dynamics.
Inflation expectations of households and price expectations of businesses remain elevated, and their trends are diverging. In April, inflation expectations of households declined, whereas price expectations of companies went up. That said, there was an increase in the heterogeneity of trends in businesses’ price expectations across industries: since the beginning of 2023, a notable drop in price expectations in agriculture has come with their increase in retail and wholesale trade. Analysts’ medium-term inflation expectations are anchored close to 4%.
Annual inflation will temporarily remain below 4% in the coming months under the influence of last year’s high base effect. At the same time, the Bank of Russia forecasts that it will begin to grow gradually in the second half of 2023 as the low values of monthly price increases of summer 2022 exit calculations and the moderate levels of sustained inflation expand. According to the baseline scenario, given the monetary policy stance, annual inflation will come in at
Monetary conditions remain broadly neutral. Since the previous key rate review meeting of the Bank of Russia Board of Directors, yields on short-term OFZs have slightly declined. Yields on medium- and long-term OFZs are little changed. Loan and deposit rates have been close to their levels of early 2023.
Credit activity has been high overall, especially in the mortgage and corporate sectors. Unsecured consumer lending has grown at an accelerated pace. Meanwhile, banks have reported ongoing inflows of household funds to current accounts and deposits. Overall improvements in consumer sentiment and rebounding consumer lending signal the emergence of a gradual decline in the propensity to save from its increased levels.
Economic activity. The economy is rising faster than the Bank of Russia’s February forecast assumed. This reflects both an expansion in domestic demand and the ongoing processes of transformation of the Russian economy. Growing domestic demand is supporting an improvement in business sentiment despite persistently challenging external conditions.
The current capacity to expand production in the Russian economy is largely limited by labour market conditions. Unemployment has dropped to a new historical low. Labour shortages are increasing in many industries amid the effects of the partial mobilisation as growth in businesses’ demand for labour continues. In these circumstances, productivity growth can lag behind real wage growth.
Changes in the aggregate demand structure continue amid the structural transformation of the economy. Consumer demand continues to recover, but it is still moderate. At the same time the overall contribution of fiscal policy to the expansion of aggregate demand is still increasing, including due to growing government investment.
Taking into account new data on economic trends and the ongoing structural transformation of the Russian economy, the Bank of Russia’s baseline scenario forecasts that GDP growth will be
Inflation risks. The medium-term balance of risks has not significantly changed and remains tilted to the upside.
Meaningful inflation risks are related to geopolitical tensions affecting foreign trade terms. As a result, increasing foreign trade and financial restrictions can further weaken demand for Russian exports, contributing to inflation through exchange rate movements. Moreover, the increasing complexity of production, supply chains and payments due to external restrictions could lead to both higher import prices and more severe supply-side constraints in the Russian economy. Given the volatility in the financial markets of advanced economies, a deterioration in the global economic growth outlook can also have significant short-term pro-inflation effects.
The Bank of Russia’s baseline scenario is based on the decisions already made regarding the medium-term expenditure path of the federal budget and the fiscal system as a whole. In case of a further expansion in the budget deficit, tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4% further on.
Proinflationary risks from the labour market remain. Significant shortages of labour force in some industries may lead to labour productivity growth lagging behind growth in real wages.
High and unanchored inflation expectations, which are particularly sensitive to exchange rate fluctuations, are also a source of risk. Under these conditions, the continuing growth of the most liquid assets in the structure of household savings may spur a rise in consumer demand in the future.
A disinflationary risk for the baseline scenario is the continued high propensity to save amid increased general uncertainty as households take time to adapt to a new supply structure in consumer markets. A growing risk premium in bond yields and lending rates may additionally tighten monetary conditions, which will restrain lending. A disinflationary effect may also be caused by a faster economic transformation, accompanied by an active recovery of imports among other things.
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. Given gradually rising inflationary pressures, the Bank of Russia’s forthcoming Board meetings will consider the necessity of key rate increase to stabilise inflation close to 4% in 2024 and further on.
Following its Board of Directors’ key rate meeting on 28 April 2023, the Bank of Russia publishes its medium-term forecast.
The Bank of Russia Board of Directors will hold its next rate review meeting on 9 June 2023. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.
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