On 18 September 2020, the Bank of Russia Board of Directors decided to keep the key rate at 4.25% per annum. In recent months, price growth rates were slightly higher overall than the Bank of Russia’s expectations. This is driven by two key factors: an active recovery of demand after the lockdown as well as the weakening of the ruble on the back of generally increased volatility in global markets and higher geopolitical risks. Inflation expectations of households and businesses remain elevated. Although the effect of short-term proinflationary factors has strengthened, disinflationary risks still prevail in the medium run. As the stage of lively recovery growth owing to restriction lifting and support measures completes, the pace of return of the global and Russian economies to their potential will slow down. This will have a constraining effect on price growth rates. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will reach
If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. 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 developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
Inflation dynamics. In recent months, price growth rates were overall slightly higher than the Bank of Russia’s expectations. This is driven by two key factors: an active recovery of demand after the lockdown as well as the weakening of the ruble on the back of generally increased volatility in global markets and higher geopolitical risks. In August, annual inflation rose to 3.6% (vs 3.4% in July). According to an estimate as of 14 September, it was 3.7%. According to Bank of Russia estimates, current consumer inflation indicators reflecting the most sustainable price movements are close to 4% (annualised). At the same time, consumer price dynamics continue to be heterogeneous due to an uneven recovery pace in various industries.
Inflation expectations of households and businesses remain elevated. Analysts expect that prevailing disinflationary factors will keep inflation in the middle of next year slightly below 4%. Their expectations are anchored close to 4% on a longer horizon.
The remaining downward deviation of the economy from its potential creates disinflationary pressure. At the same time, the risks of inflation substantially deviating downwards from the target in 2021 are limited owing to the key rate decisions already made and the accommodating monetary policy pursued. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will reach
Monetary conditions have generally softened since the previous meeting of the Bank of Russia Board of Directors. Loan and deposit rates mainly declined; lending expansion continued. The fact that longer-term OFZ yields rose due to increased volatility in financial and commodity markets and higher borrowing volume failed to produce significant effects on domestic monetary conditions. Apart from key rate reduction, interest rates and lending dynamics are substantially influenced by the preferential programmes implemented by the Government and the Bank of Russia as well as by regulatory relaxations. When making its key rate decisions, the Bank of Russia will assess the impact of cancelling these anti-crisis measures on monetary conditions.
Against the backdrop of a substantial decline in interest rates, financial institutions, businesses and consumers are adjusting to changing financial market conditions. Saving models will need some time to adjust, as will the potential redistribution of funds across different financial tools, in a way that does not create risks for consumers, businesses and financial institutions.
Economic activity. Q2 GDP was 8.0% lower in annual terms, which is a somewhat better estimate than previously expected. Once restrictive measures were eased, a faster than expected rebound in economic activity is emerging. Recovery is the strongest in sectors focused on consumer demand. However, weak external demand remains a drag on economic activity. Once the first stage of economic recovery growth has petered out, the increase in economic activity will continue in a more gradual manner. The economic growth path will be largely influenced by the upcoming budget consolidation, further coronavirus pandemic developments across the globe and in Russia, as well as by the nature of recovering private demand in the context of potential change in consumer and business behaviour. The recent reduction in the key rate will continue to support the economy this and next year.
Inflation risks. Disinflationary risks still prevail over proinflationary ones over the medium-term horizon although proinflationary risks rose somewhat over the short-term horizon.
Disinflationary risks under the baseline scenario are chiefly connected with further developments in the coronavirus pandemic situation in Russia and globally, the scale of possible measures to fight it and their impact on economic activity, as well as the speed at which both the global and Russian economies will recover as restrictive measures are mitigated. Persistent changes in consumer preferences and behaviour including a persistent higher propensity to save might exert a constraining influence on inflation.
Short-term proinflationary risks are in the first place connected with stronger volatility in global markets, driven by various geopolitical developments, among other factors, which may have an effect on exchange rate and inflation expectations. Upward pressure on prices may also lead to temporary disruptions in production and supply chains in the post-restriction period, as well as to additional corporate costs of protecting staff and consumers from the spread of the pandemic.
Uncertainty remains as to rather long-term structural effects of the coronavirus pandemic for the Russian and global economies, specifically, the scale of a decrease in the potential of the national economy. Potential global growth may also come under marked pressure from geopolitical factors including trade conflicts. The extent of the Russian economy’s deviation from its potential is, in turn, the core driver of medium-term inflation movements.
Medium-term inflation dynamics are significantly impacted by fiscal policy. When making its monetary policy decisions, the Bank of Russia bases on the fiscal policy path stipulated in draft federal budget for 2021-2023.
If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. 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 developments over the forecast horizon, 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 23 October 2020. 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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