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On 10 June 2022, the Bank of Russia Board of Directors decided to cut the key rate by 150 basis points to 9.50% per annum. The external environment for the Russian economy remains challenging and significantly constrains economic activity. At the same time, inflation is slowing faster and the decline in economic activity is of a smaller magnitude than the Bank of Russia expected in April. Recent data suggest that price growth rates in May and early June have been low. This comes as a result of ruble exchange rate movements and the tailing-off of the surge in consumer demand in the context of a marked decline in inflation expectations of households and businesses.

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 will consider the necessity of key rate reduction at its upcoming meetings. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will total 14.0–17.0% in 2022, decline to 5.0–7.0% in 2023 and return to 4% in 2024.

Inflation movements. Current inflation is appreciably below the Bank of Russia’s April forecast. As of 3 June, annual inflation is down to 17.0% (vs 17.8% in April). Based on the latest data, growth rates of consumer prices have been low in May and early June.

The decline in headline inflation is largely due to a correction in prices for a small group of goods and services, after they went up sharply in March. This comes as a result of ruble exchange rate movements and the tailing-off of the surge in consumer demand in the context of a marked decline in inflation expectations of households and businesses. At the same time, current rates of price growth in the greater part of the consumer basket, although having dropped, are still significantly above 4% annualised.

The Bank of Russia’s baseline scenario expects annual inflation to run at 14.0–17.0% by the end of 2022. Inflation movements will be shaped including 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. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will reduce to 5.0–7.0% in 2023 to return to 4% in 2024.

Monetary conditions are overall tight, having softened unevenly across various segments of the financial market. OFZ yields and interest rates in the credit and deposit market have turned downwards. With deposit rates dropping, the inflow of funds into term ruble deposits has slowed. At the same time, price and non-price bank lending conditions have remained rigid on the back of a higher risk premium factored into lending rates and tighter borrower requirements of banks. This leaves retail and corporate lending operations weak. Credit gained support from government-subsidised lending programmes.

The Bank of Russia’s decisions in April-June to reduce the key rate will boost the availability of credit resources in the economy and limit the scale of economic decline. At the same time, the monetary policy stance will retain its necessary disinflationary impact to bring inflation back to target in 2024. The Bank of Russia forecasts that the key rate will average 10.8—11.4%1 in 2022, 7.0–9.0% in 2023 and 6.0–7.0% in 2024.

Economic activity. High-frequency indicators point to a halt in the decline in business activity in May after it dropped sharply in April. At the same time, trends across sectors were mixed.

The decline in economic activity is caused by developments in both demand and supply. Survey data show that enterprises are still struggling to fix production and logistics — despite the nascent diversification in suppliers of finished products, raw materials and components, as well as in sales markets. Consumer activity in real terms is on the decline as households show a high propensity to save and real incomes shrink.

The external environment for the Russian economy remains challenging and significantly constrains economic activity. The contraction in imports due to the introduction of external trade and financial restrictions is considerably outstripping the decline in exports.

Overall, the actual decrease in economic activity in 2022 Q2 is less pronounced than the Bank of Russia assumed in its April baseline scenario. Given the above, the Bank of Russia estimates that the 2022 GDP decline could be lower than forecast in April.

Inflation risks. Proinflationary risks continue to abate, though remaining considerable.

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.

Over a short-term horizon, the effect of proinflationary factors is likely to be accentuated by high and unanchored inflation expectations. An excessive reduction in households’ propensity to save may lead to consumer demand outstripping the capacity to expand output.

Disinflationary risks to the baseline scenario are mainly linked to a consistently high risk premium in credit rates and banks’ elevated requirements for borrowers amid high uncertainty. This may cause a greater slowdown in lending.

The combination of risks created by the external environment may produce both proinflationary and disinflationary effects. A further aggravation of external trade and financial restrictions may have a proinflationary effect, thereby leading to a sharper decline in the potential of the Russian economy than expected in the baseline scenario. Supply-side constraints may in particular strengthen because of a slow replenishment of stocks of finished goods, raw materials and components in the event of persistently negative trends in imports. The materialisation of growing risks of a global recession could in turn further weaken external demand for Russian exports. Disinflationary effects could be a result of a persistently high trade surplus amid more sustainable growth in exports compared to imports.

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 will consider the necessity of key rate reduction at its upcoming meetings.

The Bank of Russia Board of Directors will hold its next rate review meeting on 22 July 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.

 

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Taking into account that from 1 January to 13 June 2022 the average key rate is 13.8%, it is forecast to be in the range of 8.5–9.5% from 14 June through the end of 2022.

 

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 10 June 2022


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