On 21 July 2023, the Bank of Russia Board of Directors decided to increase the key rate by 100 basis points to 8.50% per annum. Current price growth rates, including a variety of underlying indicators, have exceeded 4% in annualised terms and are still on the rise. The increase in the domestic demand surpasses the capacity to expand production, including due to the limited availability of labour resources. This reinforces persistent inflationary pressure in the economy. Inflation expectations have risen. Domestic demand trends and the depreciation of the ruble since the beginning of 2023 significantly amplify proinflationary risks. The Bank of Russia’s monetary policy will curtail inflation’s upward deviation from the target and is aimed at bringing inflation back to 4% in 2024.
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. The Bank of Russia holds open the prospect of further key rate increase at its next meetings 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. Inflationary pressure is on the rise. Current price growth rates, including a variety of underlying indicators, have exceeded 4% in annualised terms and are still increasing. The annual inflation rate is also growing. As of 17 June, the annual rate of consumer price growth rose to 3.6% after 2.5% and 3.3% in May and June, respectively.
Growth of inflationary pressure is seen across an increasingly broader range of goods and services. This largely indicates that the steady growth in domestic demand surpasses the capacity to expand output in many industries, including due to the limited availability of labour resources. Furthermore, the pass-through of the ruble’s depreciation to prices, which has occurred since early 2023, is gaining momentum.
Inflation expectations of households and businesses remain elevated. Moreover, inflation expectations of households increased in July. Analysts’ inflation expectations for 2023 and 2024 have also increased but are anchored close to 4% for the medium term.
The Bank of Russia’s monetary policy will curtail inflation’s upward deviation from the target and is aimed at bringing inflation back to 4% in 2024. Given the monetary policy stance, annual inflation will come in at
Monetary conditions have continued to ease. Despite an increase in nominal interest rates in certain financial market segments like OFZ market, lending activity remained robust in both the corporate and retail segments. An acceleration has been seen in mortgage lending due to trends in the market segment among others. Besides, unsecured consumer lending has been expanding at a fast pace in recent months.
Economic activity. According to the Bank of Russia’s estimate, the economy has in general completed its recovery phase. In the future, the economy’s growth rates will gradually converge towards the rates that are consistent with a balanced growth path.
Variations in the dynamics of economic activity persist, with differing trends observed across industries. In the majority of economic sectors, which specialise in meeting domestic demand, output has either reached or exceeded pre-crisis levels. Simultaneously, the expansion of output in export-oriented industries is currently significantly limited by external trade and financial constraints.
The structure of aggregate demand continues to change. Domestic demand, partially replacing external demand, contributes more and more to these changes. The steady growth of domestic demand is the result of both the increasing public sector demand and intensifying consumer demand. Concurrently, the contribution of fiscal policy to the expansion of domestic demand is still increasing, including due to growing government investment. The increasing consumer activity is supported by high lending rates, augmented real salaries, and the adjustment of households to the new structure of supply in commodity markets.
The dynamics of domestic demand contribute to a rise in demand for imports. Imports grow amid declining exports. The diverse trends in exports and imports were the main factor in the depreciation of the ruble since early 2023. In the forthcoming quarters, demand for imports will adjust to the weaker ruble already in place.
Further capabilities to expand production in the Russian economy are largely limited by the labour market situation. Unemployment has dropped to a new historical low. The labour force shortage is particularly evident in Russian regions experiencing an increased level of consumer and business activity. Concurrently, low geographic and cross-sectoral labour force mobility is an additional structural constraint.
Taking into consideration new data on the changes in economic activity in the baseline scenario, the Bank of Russia forecasts that the GDP growth rate will be
Inflation risks. Proinflationary risks have increased significantly over the medium-term horizon.
Currently, the main proinflationary risk is an increasing deviation of the Russian economy from the balanced growth path. This may happen if public sector demand continues to be high, while consumer demand increases further on. In these conditions, the expansion of domestic demand will considerably exceed the potential to increase output. Due to a limited availability of labour resources, the labour productivity growth may lag more behind the growth in real wages.
High and unanchored inflation expectations, which are particularly sensitive to exchange rate fluctuations, are also a source of risk. With regard to the above, the impact on prices from the depreciation of the ruble since the beginning of the year can be more pronounced than expected in the baseline scenario.
Meaningful proinflationary 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 higher import prices. Major short-term proinflationary effects may also deteriorate the future global economic growth.
The Bank of Russia’s baseline scenario rests on the decisions already made regarding the
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 holds open the prospect of further key rate increase at its next meetings to stabilise inflation close to 4% in 2024 and further on.
Following the Board of Directors’ key rate meeting on 21 July 2023, the Bank of Russia published its medium-term forecast.
The Bank of Russia Board of Directors will hold its next rate review meeting on 15 September 2023. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.
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