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On 28 October 2022, the Bank of Russia Board of Directors decided to keep the key rate at 7.50% per annum. Current growth rates of consumer prices as a whole remain low, contributing to a further slowdown in annual inflation. Inflation expectations of households and businesses are high and have slightly grown relative to the summer months. The updated forecast assumes inflation for the end of 2022 to total 12.0–13.0% and takes into account the preponed indexation of utility prices among other factors. The Bank of Russia assesses that the partial mobilisation will serve as a deterrent to consumer demand and inflation over the horizon of coming months. However, its subsequent effects will be pro-inflationary as it adds to supply-side restrictions.

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. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will drop to 5.0–7.0% in 2023 to return to 4% in 2024.

Inflation movements. Annual inflation continues to slow down gradually. In September, growth in consumer prices decelerated to 13.7% in annual terms (after 14.3% in August) and declined, as of 21 October, to 12.9%.

In September, monthly prices increased their growth pace on a seasonally adjusted basis. That came in part on the back of a one-off rise in insurance and mobile tariffs. Stripping out the impact of one-off factors, the monthly growth pace of prices was also up but remained low. Flash estimates in October point to overall low current inflationary pressures.

Despite the progressing decline in annual inflation, inflation expectations of households and businesses are high and have slightly grown relative to the summer months. Analysts’ medium-term inflation expectations are anchored close to 4%.

Under the Bank of Russia’s baseline scenario, annual inflation is forecast to run at 12.0–13.0% by the end of 2022. The updated forecast of the Bank of Russia takes into account, among other factors, the preponed indexation of utility prices from July 2023 to December 2022. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will decline to 5.0–7.0% in 2023, return to 4% in 2024 and stabilise close to 4% further on.

Monetary conditions remained overall neutral with a slight tightening despite the cut in the key rate in September. This comes largely as a result of growing geopolitical tensions. Against this backdrop, OFZ yields were up, the decline in credit rates came to a halt, and non-price conditions of bank lending tightened. Banks concurrently raised deposit rates in response to the flow of household funds from bank deposits to cash rubles.

Despite elevated inflation expectations and an increased share of the most liquid assets (current accounts and cash rubles) in the structure of savings, households maintained a high propensity to save.

Overall lending grew at a high pace. Lending gained support from both the key rate reduction since spring and government-subsidised lending programmes. However, signs emerged in October of a slowdown in credit activity including in the context of the tightening in non-price bank lending conditions, particularly in the retail segment. 

Economic activity. High-frequency indicators point to stronger dynamics of business activity in the third quarter than the Bank of Russia expected. A growing number of enterprises are adjusting to operate under external trade and financial restrictions. This is facilitated by a gradual diversification of suppliers of finished products, raw material and components, as well as by import substitution processes and forays into new markets including a refocus on domestic consumers.

At the same time, surveys show that a significant proportion of enterprises are still confronted with difficulties in production and logistics. Also growing are restrictions in the labour market, driven in part by the partial mobilisation. While the partial mobilisation may mainly create disinflationary pressure in the coming months due to subdued consumer demand, its subsequent effects will be pro-inflationary as it adds to supply-side restrictions in the broader economy.

In September, business and consumer sentiment slightly worsened due to a rise in overall uncertainty. In these conditions, the recovery of consumer activity, which remains restrained, slowed down. Concurrently, domestic demand was supported by fiscal policy measures, in particular by increased demand from the public sector.

In its baseline scenario, the Bank of Russia forecasts a GDP contraction of 3.0–3.5% in 2022. In 2023, the GDP growth rate will remain negative at (-4.0)—(-1.0)%. However, the Bank of Russia expects that the Russian economy will start growing in the second half of 2023. In 2024–2025, GDP will grow by 1.5–2.5% annually.

Inflation risks. There is a balance between proinflationary and disinflationary risks over a short-term horizon. As to a medium-term horizon, proinflationary risks still dominate and have grown slightly since mid-September.

A further escalation of external trade and financial restrictions, fragmentation of the global economy and the financial system could lead to a sharper decline in the Russian economy’s potential than expected in the baseline scenario. Specifically, supply-side constraints may increase due to problems with the supply of equipment, slowly replenishing stocks of finished products, raw materials and components in the event of an escalation of negative trends in import dynamics. In turn, the materialisation of growing risks of a global recession may further weaken external demand for Russian exports and provoke a weaker ruble as a result.

As for domestic conditions, proinflationary effects may be more serious than in the baseline scenario due to changes in the size of the labour force and the employment structure, including amid the partial mobilisation. Short-term proinflationary risks are also caused by high and unanchored inflation expectations, which are particularly sensitive to the ruble’s exchange rate fluctuations. Under these conditions, the growth of the most liquid assets in the structure of household savings may spur increased consumer demand in the future.

The most significant disinflationary risk for the baseline scenario is the continued high propensity of households to save amid increased general uncertainty, as well as the duration of households’ adaptation to the new supply structure in consumer markets. A more rapid adaptation of the economy, accompanied by an active recovery of imports among other things may also have a disinflationary effect. Disinflationary effects of the record harvest in 2022 could also be more noticeable in the coming months.

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.

The Bank of Russia will make its further decisions on the key rate, taking into account actual and expected inflation movements relative to the target, the process of the structural transformation of the economy, as well as assessing risks from internal and external conditions and financial markets’ response to these risks.

Following the meeting of the Board of Directors regarding the key rate on 28 October 2022, the Bank of Russia released its medium-term forecast.

 

The Bank of Russia Board of Directors will hold its next key rate review meeting on 16 December 2022. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.

 

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 28 October 2022

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Last updated on: 2022-10-28T13:30:00