On 7 June 2024, the Bank of Russia Board of Directors decided to keep the key rate at 16.00% per annum. The current price growth rate has stopped decreasing and remains close to the levels of 2024 Q1. Growth in domestic demand is still outstripping the capabilities to expand the supply of goods and services. The Bank of Russia holds open the prospect of increasing the key rate at its upcoming meeting. Furthermore, returning inflation to the target will require a significantly longer period of maintaining tight monetary conditions in the economy than it was forecast in April. According to the Bank of Russia’s forecast and given the monetary policy stance, annual inflation will return to the target in 2025 and stabilise close to 4% further on.
In April, the current seasonally adjusted price growth equalled 5.8% in annualised terms after 5.7% (on average) in 2024 Q1. Seasonally adjusted core inflation rose to 8.3% in annualised terms from 7.1% (on average) in 2024 Q1. Concurrently, one-off factors related to the indexation of tariffs on communications services and an increase in prices for domestic cars also contributed to price growth in April—May. According to the estimate as of 3 June, annual inflation stood at 8.1% after 7.8% at the end of April.
Inflation expectations of households and financial market participants went up. Businesses’ price expectations remained unchanged. Elevated inflation expectations increase the inertia of underlying inflation.
GDP data for 2024 Q1 and high-frequency indicators for 2024 Q2 show that the Russian economy continues to grow rapidly. However, in 2024 Q1, the calendar effect of a leap year partly contributed to the annual GDP growth rate. Consumer activity remains high amid a significant increase in households’ incomes and positive consumer sentiment. According to companies’ surveys, investment demand remains high. The Russian economy still shows a significant upward deviation from a balanced growth path.
Labour shortages come as the key constraint on the expansion of output of goods and services. Labour market tightness continues to grow. Unemployment has dropped to a new historical low. Real wage growth has sped up, which is, however, associated with large payments of annual bonuses in 2024 Q1.
Monetary conditions have tightened since the previous meeting of the Bank of Russia Board of Directors. Money market interest rates and OFZ yields have risen significantly, reflecting, among other things, the fact that market participants raised their expectations for the future key rate path. Both credit and deposit rates have increased. In the near future, they will continue to adjust to the already occurred growth in money market rates and OFZ yields. High market interest rates support the propensity to save. Moreover, higher incomes allow households to simultaneously increase savings and consumption.
Lending activity remains high in both retail and corporate segments. Unsecured consumer lending is supported by higher households’ incomes. Government subsidised programmes are still the key contributor to the growth in banks’ mortgage portfolios, while the dynamics in the market segment are moderate. Overall growth in corporate lending is below the peak levels of autumn 2023, though fiscal stimuli back up high corporate sector demand for loans.
Over the medium-term horizon, the balance of inflation risks has shifted even more towards proinflationary ones. The key proinflationary risks are associated with changes in terms of trade (including as a result of geopolitical tensions), persistently high inflation expectations and an upward deviation of the Russian economy from the balanced growth path. Maintaining large-scale government subsidised programmes may slow the return to more moderate lending growth rates. Disinflationary risks are primarily related to a faster slowdown in domestic demand than expected in the baseline scenario.
The planned changes in tax policy mean that higher budget expenditures in the coming years will be funded from higher consolidated budget revenues. These decisions are in line with the previously approved time-frame for the fiscal policy normalisation from 2025. According to the Bank of Russia estimates, the proposed combination of tax changes with simultaneous growth in spending is likely to be neutral for inflation.
On 20 June 2024, the Bank of Russia will publish the Summary of the Key Rate Discussion.
The Bank of Russia Board of Directors will hold its next key rate meeting on 26 July 2024. 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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