On 17 December 2021, the Bank of Russia Board of Directors decided to increase the key rate by 100 b.p. to 8.50% per annum. Inflation is developing above the Bank of Russia’s October forecast. The contribution of persistent factors to inflation remains considerable on the back of faster growth in demand relative to output expansion capacity. In this environment, given rising inflation expectations, the balance of risks for inflation is markedly tilted to the upside. This may bring about a more substantial and prolonged upward deviation of inflation from the target. The Bank of Russia’s monetary policy stance is aimed to limit this risk and return inflation to 4%.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate increase at its upcoming meetings. Key rate decisions will take into account actual and expected inflation movements 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. Based on the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will edge down to
Inflation dynamics. Inflation is developing above the Bank of Russia’s October forecast. In October and November, seasonally adjusted growth in consumer prices rallied to a six-year high. Annual inflation went up to 8.4% (from 7.4% in September). It is estimated at 8.1% as of 13 December.
Indicators reflecting the most sustainable price movements still appreciably exceed 4% (annualised), Bank of Russia estimates show. This reflects the fact that steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors. In these conditions, businesses find it easier to pass higher costs, including on the back of rising global prices, on to consumers.
The impact of one-off supply-side drivers of inflation is translating into growing prices for a wider range of goods and services as inflation expectations of households and businesses remain high and unanchored. Households’ inflation expectations went up again in December to a fresh five-year high. Recent data also indicate that businesses’ price expectations are holding close to multi-year highs. Analyst expectations for 2022 have increased slightly, but are anchored close to 4% for the medium term.
The dominating influence of inflationary factors could lead to a more substantial and prolonged deviation of inflation upwards from the target. The Bank of Russia’s monetary policy stance is aimed to limit this risk and return annual inflation to 4%. Under the baseline scenario, annual inflation will edge down to
Monetary conditions, although tightened since the previous Board meeting, are still estimated as neutral. Rising nominal interest rates in the context of elevated inflation expectations have so far made a limited impact on lending and the propensity to save.
Yields of short-term OFZs are up, reflecting market expectations for the key rate path. Yields on medium- and long-term OFZs have also increased, including due to heightened geopolitical tensions. Lending and deposit rates sustain their growth driven by the key rate rises between March and October. Funds are gradually flowing into fixed-term ruble deposits. Disbursements of corporate and retail loans are still high. The Bank of Russia’s monetary policy stance will help solidify a trend towards the growing appeal of household deposits, protect the purchasing power of savings and ensure balanced expansion in lending.
Economic activity is growing across a wide range of industries. However, supply-side constraints remain strong in a number of sectors. Their restraining effect on business activity may strengthen in the context of the spread of new coronavirus strains and the associated tightening of anti-pandemic measures.
The rapidly expanding lending, growth in real wages and households’ low propensity to save, driven by high inflation expectations, all support rising consumer activity, especially in non-food markets. Consumption of commercial services has approached its pre-pandemic level, despite the challenging epidemiological situation. Growing domestic and external demand and high corporate profits are shoring up investment activity.
Inflationary pressure from the labour market has intensified. Demand for the labour force is growing in many industries. At the same time, many sectors show labour shortages, despite the inflow of foreign labour. The unemployment rate has dropped to a record low, while the number of vacancies is at a record high. The state of the labour market suggests that a further increase in steady growth rates of the Russian economy will be conditional primarily on the growth paces of labour productivity.
Based on current trends in the Russian and global economy, GDP is projected to grow 4.5% in 2021.
Inflation risks. The balance of risks is markedly tilted to the upside. The effect of proinflationary factors may be strengthened by elevated inflation expectations and accompanying secondary effects.
Inflation slowdown may be hampered by remaining disruptions in production and logistics chains, labour shortages, as well as structural changes in the labour market caused by the pandemic. An increase in structural labour shortages may cause labour productivity growth to lag behind wage growth.
Inflation risks posed by price trends in global commodity markets also remain relevant. Further changes in food prices will largely depend on the harvest volume, quality and preservation both in Russia and abroad.
Short-term inflation risks are also associated with intensified volatility in global markets caused by, among other factors, a range of geopolitical events, which may affect exchange rate and inflation expectations. Given further intensification of inflationary pressure in the world economy, the central banks of advanced economies are forced to implement a faster normalisation of monetary policy. This may become an additional driver of higher volatility in global financial markets.
Disinflationary risks for the baseline scenario remain moderate, largely linked to the pace and extent at which supply is adjusting to growing demand. The reopening of borders as restrictions are lifted may lead to a recovery in the consumption of foreign services and also alleviate the problem of labour shortages owing to an additional inflow of foreign labour. A faster — relative to the baseline scenario — normalisation of production and logistics chains in the Russian and global economies may become another source of downward pressure on prices.
Medium-term inflation is largely influenced by fiscal policy. In its baseline scenario, the Bank of Russia proceeds from the fiscal policy normalisation path stipulated by the Guidelines for Fiscal, Tax and Customs and Tariff Policy, which assumes a return to fiscal rule parameters in 2022. In its forecast, the Bank of Russia also factors in decisions made by the Government of the Russian Federation to invest the liquid part of the National Wealth Fund.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate increase at its upcoming meetings. Key rate decisions will take into account actual and expected inflation movements 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 key rate review meeting on 11 February 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.
Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 17 December 2021
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