The Board of Directors of the Bank of Russia decided to raise the key rate by 100 bps, to 16.00% per annum, on December 15 2023. Current inflationary pressures remain high. At the end of 2023, annual inflation is expected to be near the upper boundary of the forecast range
The Bank of Russia will make further decisions on the key rate with consideration of actual and expected inflation dynamics relative to the target, economic development on the forecast horizon, and also assessing risks from internal and external conditions and the reaction to them by financial markets. According to the Bank of Russia’s forecast, c taking into account the ongoing monetary policy, annual inflation will decrease to
Inflation dynamics. Current inflationary pressures remain high. In October October — November, the seasonally adjusted price increase averaged 10.0% in year-on-year (compared with 12.2% in Q3 ). Annual inflation, as estimated on December 11 11 decreased to 7.1% after 7.5% in November. This was due to the high-base effect of early December 2022 when unscheduled indexation of tariffs for utilities took place. At the end of 2023, annual inflation is expected to be near the upper boundary of the forecast range of
Sustained inflationary pressures have intensified in recent months. This is due to faster growth in domestic demand compared to opportunities to expand output of goods and services than the Bank of Russia estimated earlier. This is evidenced by data on the dynamics of economic activity in the second half of 2023 including operational data for the fourth quarter. In the October — November, the seasonally adjusted core inflation rate increased to 11.5% in year-on-year (compared with 9.7% in Q3 ). One-off pro-inflationary effects in individual commodity markets have also made some contribution to the current price increase in recent months
Inflation expectations of households and price expectations of businesses have risen. Inflation expectations of professional analysts remain above the inflation target for 2024 but for the medium term they are anchored near 4%.
The inflation expectations of professional analysts remain above the inflation target for 2024 but they are anchored near 4%.
According to the Bank of Russia’s forecast, with taking into account the ongoing monetary policy, annual inflation will fall to
Monetary conditions generally continued to tighten following the key rate hike in July—October. Short-term financial market rates rose in connection with upward revisions by market participants to the expected trajectory of the key rate. In the government debt market, medium- and long-term yields did not change significantly. Interest rates in the credit and deposit market continued to grow
After the growth of deposit rates, the inflow of households’ funds to credit organizations increased, including at the expense of the return of a part of cash to bank accounts. At the same time, funds continued to flow from current accounts to time deposits
Some segments of the credit market showed signs of slowdown in activity, but the overall growth rate of lending remains high. The slowdown in unsecured consumer lending in recent months was a result of both rising interest rates and the effects of earlier macroprudential measures. Activity in the market segment of mortgage lending also slowed down, although the growth rate of the total mortgage portfolio was high due to the large volume of lending under government concessional programs. Activity remained particularly high in the corporate segment, where lending growth rates are higher than the Bank of Russia’s October forecast. The increased demand of the corporate sector for loans is supported by both high price expectations and expectations regarding the future dynamics of domestic demand
Economic activity. GDP growth in Q3 and operational data for Q4 indicate that the increase in economic activity is significantly faster than the Bank of Russia expected in October. This means that the upward deviation of the Russian economy from the balanced growth trajectory in the second half of 2023 was more significant. This was reflected in the current growth of prices. According to the Bank of Russia’s assessment, GDP growth in 2023 will be higher than the October forecast and will exceed 3%.
According to the Bank of Russia, GDP growth in 2023 will exceed 3%
The main contribution to the upward deviation of the Russian economy from the balanced growth trajectory was made by domestic demand. Its growth is due to the expansion of private demand while maintaining the state demand at a high level. The increase in consumer activity is supported by the growth of real wages and lending. Strong growth in corporate profits and positive business sentiment, also due to fiscal stimulus, support strong investment demand
Operative data on foreign trade indicate that imports were slightly down from the peak values of the summer months, including due to the effects of the monetary policy tightening that took place. At the same time, the decline in exports in recent months was more pronounced due to the deterioration of the global energy markets. In the coming quarters, demand for imports in ruble terms will continue to adjust to the already taken decisions on the key rate.
At the current stage, the key constraint on the supply side in the Russian economy is related to the state of the labor market. According to business surveys, the shortage of available labor resources remains significant, especially in manufacturing sectors. Unemployment has once again renewed its historical minimum. The low geographical and inter-sectoral mobility of the labor force is an additional structural constraint
Inflation risks. Over the medium-term horizon, pro-inflationary risks remain significant.
Inflationary risks
In the baseline scenario, the Bank of Russia proceeds from the already adopted decisions of the Government on the medium-term trajectory of federal budget expenditures and the budget system as a whole. In case of additional expansion of the budget deficit, proinflation risks will increase again and tighter monetary policy may be required to bring inflation back to the target in 2024 and maintain it near 4% thereafter.
The Bank of Russia is confident that the inflation rate will remain near 4% in the future
A significant risk is that inflation expectations remain at elevated levels or they rise further. In this case, lending will continue to expand at an accelerated pace, while the population’s propensity to save — decline. As a consequence, the growth of domestic demand will continue to outpace the potential for supply expansion and intensify sustained inflationary pressures in the economy. Under conditions of limited free labor resources, labor productivity growth may lag behind real wages growth.
Labor productivity growth may lag behind real wages growth
Inflationary risks are also associated with the impact of geopolitical tensions on the terms of foreign trade. Strengthening of external trade and financial restrictions may additionally weaken demand for Russian export goods and have a pro-inflationary impact through the dynamics of the exchange rate. In addition, the complication of production and logistics chains or financial settlements as a result of external restrictions may lead to higher import prices. Significant short-term proinflationary effects may also be caused by deterioration of the global economic growth prospects and increased volatility in global commodity and financial markets
Disinflationary risks are primarily associated with a faster slowdown in domestic demand under the influence of already implemented monetary policy tightening.
The return of inflation to target in 2024 and its further stabilization near 4% suggest a prolonged period of maintaining tight monetary conditions in the economy. The Bank of Russia will make further decisions on the key rate with consideration of the actual and expected dynamics of inflation relative to the target, economic development on the forecast horizon, as well as assessing the risks from internal and external conditions and the reaction to them on financial markets
The next meeting of the Board of Directors of the Bank of Russia, at which will consider the level of the key rate, is scheduled for 16 February 2024 2024. The time of publication of the press release on the decision of the Board of Directors of the Bank of Russia and the medium-term forecast — 13:30 Moscow time.
Statement by the Chairman of the Bank of Russia Elvira Nabiullina on the results of the meeting of the Board of Directors of the Bank of Russia on December 15 2023