In 2022, the Russian economy entered the phase of a structural transformation of the economy due to unprecedented restrictions imposed on trade and finance. The objective of state authorities is to promote conditions that would enhance the efficiency of the transformation of the economy and limit the decline in economic activity without creating risks to macroeconomic stability.
Goals and principles
The goal of the Bank of Russia’s monetary policy is to protect the ruble and ensure its strength. The Bank of Russia ensures the strength of the ruble by maintaining price stability which is essential for balanced and sustainable economic growth. Price stability implies steadily low inflation. It protects households’ incomes and savings, makes economic conditions for companies and households more predictable, and contributes to higher affordability of debt financing for companies.
Maintaining price stability, the Bank of Russia pursues the inflation targeting strategy. The advantage of this strategy is its flexibility, which is crucial for addressing the tasks of the transformation of the Russian economy in the next few years. The Bank of Russia chooses such a path for returning inflation to the target that would also minimise the deviation of output from its potential. Thus, the Bank of Russia promotes the stability and predictability of economic conditions necessary for the transformation and development.
Monetary policy principles:
The objective of monetary policy is to maintain inflation close to 4% on a continuous basis. This target is disclosed to people, businesses, and financial market participants for them to take it into account when making economic decisions and future plans.
The inflation target is set for the annual growth rate of consumer prices, that is, the change in prices for goods and services purchased by households over the last 12 months. The wording ‘close to 4%’ implies that inflation might naturally slightly hover around 4%. During the structural transformation of the economy, the scale of such fluctuations increases due to a considerable adjustment of prices to the dramatic changes in the economic environment.
Following the drastic changes in external conditions in early 2022, annual inflation significantly deviated upwards from the target. The Bank of Russia will set the key rate so as to reduce annual inflation to 4% in 2024 and maintain it at this level further on. Considering the scale and nature of the factors impacting the economy and prices, the Bank of Russia chooses a smooth path for bringing inflation back to the target. Some of these factors are beyond the influence of monetary policy.
Since the end of 2014, the Bank of Russia has been pursuing the floating exchange rate regime. This means that foreign exchange rates against the ruble are determined by the ratio of demand for and supply of foreign currency in the foreign exchange market. The Bank of Russia sets no targets or limits for the level of the exchange rate or the pace of its movements.
The floating exchange rate is an essential condition for an efficient implementation of monetary policy within the inflation targeting strategy. It helps the economy better adjust to changes in external conditions than under a fixed and managed exchange rate regime. Furthermore, it enables the regulator to implement an independent monetary policy. A floating exchange rate has a stabilising effect on the economy, which is especially important during the periods of structural economic transformations.
In late February—early March, due to the changes in external conditions, Russia introduced capital controls. This measure was a forced response to the foreign restrictions. In particular, the Bank of Russia lost the opportunity to use a part of its international reserves in the world’s main reserve currencies in order to mitigate risks to financial stability. Coupled with other adopted measures, the capital controls made it possible to protect the stability of the Russian financial system. As risks decrease, these restrictions are eased gradually.
Despite the effective capital controls, the exchange rate of the ruble remains floating. In the new conditions, its movements predominantly depend on the ratio of importers’ demand for foreign currency and exporters’ supply of foreign currency.
The key rate is the interest rate on main operations carried out by the Bank of Russia to regulate the banking sector liquidity. The key rate impacts market interest rates which influence households’ and businesses’ propensity to consume, save, and invest. This factor determines domestic demand in the economy that impacts price movements.
The Bank of Russia relies on sustainable economic trends and long-term factors when making its decisions on the key rate. By changing the key rate level so as to prevent an inflation deviation from the target or return inflation to the target, the Bank of Russia simultaneously helps support the output of goods and services close to its potential. This is the countercyclical role of monetary policy.
Using monetary policy instruments, the Bank of Russia is able to ensure the return of inflation, in the case of its deviation, to the target over
Any key rate decision is accompanied by an explanation of its logic, as well as, basically, by a signal regarding possible further monetary policy decisions and — four times a year — by the publication of the projected path of the key rate. These are the key elements of the Bank of Russia’s communication on its monetary policy. Communication of its future intentions are an important instrument for managing inflation expectations and their anchoring to the inflation target.
As monetary policy decisions influence price movements with a time lag, the Bank of Russia relies on the macroeconomic forecast in its decisions and takes into account proinflationary and disinflationary risks. When preparing its forecast and assessing related risks, the Bank conducts an in-depth analysis of a wide range of data.
The Bank of Russia follows the conservative approach when assessing the balance of inflation risks over the forecast horizon, while focusing slightly more on proinflationary factors. This is associated with the specifics of inflation expectations in Russia. Professional market participants’ inflation expectations are generally anchored to the target, whereas households’ and businesses’ inflation expectations remain sensitive to short-term proinflationary factors. Rising inflation expectations might provoke a long-lasting deviation of inflation from the target and require a monetary policy response. This effect may be especially strong during the period of material changes in the economy and elevated uncertainty.
In 2022, the aggregate output of goods and services is expected to contract as a result of the enacted foreign restrictions on trade and finance. This decline will be partly a reduction in potential output. Because of uncertainty about the estimated scale of the decrease in potential and the efficiency of the current processes of the structural transformation, the Bank of Russia should act more cautiously implementing its monetary policy.
The Bank of Russia seeks to promptly and amply communicate the information on the goals, principles, measures and results of its monetary policy, as well as on the assessment of the economic situation and its prospects. Society’s understanding of and confidence in the monetary policy pursued are crucial for its efficient implementation and anchoring inflation expectations to the inflation target. The Bank of Russia is continuously working to improve the outreach of its monetary policy and to make the communication more targeted, including at the regional level.
During the period of the tremendous changes and enormous uncertainty in early 2022, the Bank of Russia has expanded its communication with society. Specifically, the Bank of Russia created the section Financial Market Protection Measures that was promptly updated as the regulator made new decisions. This section provided answers to frequently asked questions, including about monetary policy. Additionally, the Bank of Russia has launched its Telegram channel posting important decisions, analytics, and news on the Bank of Russia’s work beginning from the end of February. Reliable and comprehensible explanations of current economic developments and their potential consequences help reduce uncertainty and stabilise the situation.
Monetary policy in late 2021 and 2022
❶ Inflation acceleration due to demand expansion surpassing capacities to ramp up output (December 2021–mid-February 2022)
The Bank of Russia continued the cycle of the key rate increase started in March 2021. In late 2021—early 2022, annual inflation was rising, exceeding the forecast level and substantially deviating upwards from the target. Inflation accelerated both in Russia and worldwide because the expansion of demand surpassed the potential to ramp up output in a wide range of industries. The capacities to increase output were limited due to disruptions in production and logistics chains amid the coronavirus pandemic, among other reasons. To return inflation to the target and drive the economy back to a balanced growth path, the key rate was raised to 9.5% per annum by the middle of February 2022. Moreover, the Bank of Russia admitted the possibility of its further increase.
❷ Response to severe threats to price and financial stability (late February–March 2022)
At the end of February, the external conditions for the Russian economy altered dramatically. Foreign countries enacted unprecedentedly large-scale sanctions against Russia to break the established trade and financial relations and isolate the Russian economy from the world economy. Jointly with other state authorities, the Bank of Russia promptly responded to the growth of risks to price and financial stability, including through monetary policy measures. By early April, the country managed to overcome the acute stage of the crisis. The urgent increase in the key rate to 20.0% per annum on 28 February helped prevent an outflow of clients’ funds from banks, maintain the attractiveness of ruble savings, and prevent an uncontrollable rise in prices.
❸ Stabilisation of the situation and the start of the structural transformation of the economy (April–July 2022)
By April, risks to financial stability started to edge down. Households were returning their funds to the banking system, including time ruble deposits. The ruble exchange rate, just as the situation in the financial market in general, stabilised. Risks to price stability weakened as well: current price growth of consumer prices and households’ and businesses’ inflation expectations considerably decreased. The Bank of Russia promptly responded to the changes in the situation and reduced the key rate several times, including at the unscheduled meetings of the Board of Directors. Beginning from April, the key rate was cut from 20.00% to 8.00% per annum. The Bank of Russia made these decisions considering that the key rate decreases during that period would improve the affordability of credit in the economy and limit the magnitude of the economic decline. That said, monetary policy will still have the required disinflationary effect to bring inflation back to the target in 2024.
❹ Future decisions
A further path of the key rate will depend on the future balance of risks to the achievement of the 4% target in 2024. The rapidly changing situation characterised by a sequence of processes diversely influencing inflation and the economy requires greater prudence and flexibility in the Bank of Russia’s monetary policy decisions and closer attention to high-frequency information. The Bank of Russia will explore the need to further reduce the key rate in 2022 H2.
The Bank of Russia’s forecast scenarios factor in the extraordinary changes of 2022 in the internal and external environment for the Russian economy, as well as their possible evolution. Speaking of internal conditions, the most critical factor is how successfully and quickly people and companies will be able to adapt to the new reality. As regards external conditions, there is still high uncertainty over the medium-term horizon about a number of processes in the world: inflation persistence and monetary policy tightening, demand trends and bottlenecks in global supply chains, volatility in the food and commodity markets, large amounts of accumulated debts, anti-pandemic measures, and geopolitical tensions.
The characteristics of the baseline and alternative scenarios associated with these circumstances are as follows:
- The state of the world economy that depends on how quickly supply-side problems are settled, how well inflation expectations are anchored, what response measures are taken by central banks, and how stable economic agents’ financial position is amid rising monetary policy rates in advanced economies (namely, the USA and the euro area).
- The pace of the adaptation of the Russian economy to the new conditions that depends on the establishment of new economic relations, the launch of new production facilities, the efficiency of import substitution processes, and the development of parallel import mechanisms.
- The impact of geopolitical conditions on the Russian economy which depends on whether or not foreign countries will impose additional sanctions on external trade and how significant the secondary effects of the sanctions may be, including non-formal restrictions from a wide range of counterparties.
|Annual inflation||8.4||12.0 — 15.0||5.0 — 7.0||4.0||4.0|
|Gross domestic product||4.7||(-6.0) — (-4.0)||(-4.0) — (-1.0)||1.5 — 2.5||1.5 — 2.5|
|— % change in Q4 YoY||5.0||(-12.0) — (-8.5)||1.0 — 2.5||1.0 — 2.0||1.5 — 2.5|
|Key rate, % p.a., yearly average||5.7||10.5 — 10.8||6.5 — 8.5||6.0 — 7.0||5.0 — 6.0|
|Banking system’s claims on the economy in rubles and foreign currency, including:||13.9||5 — 10||8 — 13||9 — 14||8 — 13|
|● on organisations||10.7||5 — 10||7 — 12||8 — 13||8 — 13|
|● on households, including:||22.0||5 — 10||9 — 14||9 — 14||8 — 13|
|— housing mortgage loans||26.7||13 — 18||10 — 15||10 — 15||10 — 15|
In the baseline scenario, the world economy continues to develop within the already existing trends. Central banks of the largest economies will raise their policy rates in response to accelerating inflation. This will slow down the growth of the world economy. However, by pursuing cautious monetary policy, the largest economies will be able to avoid a large-scale recession. Inflation abroad will return close to the target in late 2023—early 2024. Most of the sanctions enacted against the Russian economy will remain over the entire forecast horizon.
The baseline scenario assumes that the Russian economy will be contracting in 2022 and for the most part of 2023, adjusting to the changed external conditions. In 2025, the economy will return to its potential growth rates of
Given the monetary policy pursued, annual inflation will equal
In its baseline scenario, the Bank of Russia forecasts that the average key rate will be in the range of
The alternative scenario Fast Adaptation assumes a quicker adjustment of the Russian economy to the new conditions, as compared to the baseline scenario, with the state of the world economy and the geopolitical environment being similar. Although central banks of the major countries will raise their policy rates, the world economy will avoid a large-scale recession. The geopolitical environment will not change relative to mid-2022.
A faster structural transformation of the economy will be primarily driven by better import dynamics than forecast in the baseline scenario. New economic relations to be established and the expansion of parallel imports will also boost imports over the forecast horizon.
The value of exports will increase as well, as compared to the baseline scenario, boosted by growing quantities of exports, including of oil and gas. This upward trend will be encouraged by the development of new supply routes and energy commodity delivery methods, as well as a reduction in transportation, insurance and other logistics costs.
According to the Fast Adaptation scenario, the Russian economy might start to grow as early as 2023 thanks to new partnerships and economic relations. Supply-side constraints will dissipate faster owing to a quick saturation of markets with both new goods and common items through the parallel import mechanism. As a result, annual inflation will return to the level close to the target already by the end of 2023 amid a more accommodative monetary policy than under the baseline scenario. In
According to the alternative scenario Global Crisis, the fragmentation in the world economy will intensify. Trade between countries will concentrate increasingly more in regional blocks. Countries will focus less on using relative advantages and more — on increasing the localisation of production facilities. In this context, the scenario assumes that two risks strengthening each other will materialise simultaneously in early 2023.
Firstly, persistently high inflation in the largest economies might require their central banks to tighten their monetary policies more quickly and considerably. This will entail a recession in the largest economies. As to emerging market economies, especially those that have accumulated large amounts of external debt, a rise in external rates might seriously decrease financial stability.
Secondly, this scenario assumes an escalation of geopolitical tensions globally, including new sanctions that might be enacted against the Russian economy. The combination of these events might aggravate imbalances in the world economy and provoke a new global financial and economic crisis, the scale of which might be comparable with that of the
A global crisis decreasing external demand coupled with a worsening of the geopolitical environment reducing export prices and quantities will considerably complicate the structural transformation of the Russian economy and its adaptation to the new conditions. GDP will contract in 2023 more than in 2022. It will continue to decline in 2024 and might slightly grow by about 1% only in 2025.
Annual inflation will speed up to
Use of monetary policy instruments
The operational objective of the Bank of Russia’s monetary policy is to keep overnight money market rates close to the key rate. Over January—June 2022, the average deviation of RUONIA (the operational benchmark of monetary policy) from the Bank of Russia key rate equalled −28 basis points, which is more than in 2021. In February—March, the volatility of this deviation increased temporarily, but then returned to normal.
According to the experience of 2022, the system of the Bank of Russia’s monetary policy instruments made it possible to fully meet banks’ demand for liquidity and offset the impact of external factors even in the conditions of extremely high volatility. Despite the extraordinary shocks that the banking sector had to address, the existing operational procedure demonstrated its efficiency and flexibility and helped stabilise the situation over a short period. The earlier achieved stability of the banking system is essential as well. By the moment of the crisis, banks had a sufficient amount of high-quality assets that they were able to use for raising the required liquidity from the Bank of Russia. The support measures implemented by the Bank of Russia ensured the smooth functioning of banks and helped gradually restore turnovers in the short-term interbank lending segment of the money market to the level of early 2022 on average.
Switching to inflation targeting back in early 2015, the Bank of Russia chose the target of 4% considering the actual specifics of pricing and the structure of the Russian economy, as well as the extensive experience of inflation targeting worldwide. The inflation target of ‘close to 4%’ is slightly higher than in economies with mature market mechanisms, long-term experience of maintaining price stability, high confidence in monetary authorities, and low inflation expectations. Inflation targets in such economies generally range from 1% to 3%. The Bank of Russia estimated that it would be very hard to continuously maintain inflation close to this level in Russia due to high and unanchored inflation expectations among companies and households amid long-term high inflation over previous decades, the insufficient maturity of its market mechanisms and sectoral diversification of the economy. In addition to the above factors, the 4% target was selected so as to mitigate the risks of deflationary trends in the markets of individual products.
The Bank of Russia continues to rely on the assessment of the longer-run real neutral rate for the Russian economy equalling
Due to the sanctions enacted in February 2022, the Bank of Russia lost the opportunity to use a part of its international reserves to mitigate risks to financial stability. In this context, the Bank of Russia was forced to introduce capital controls. According to the theory and the practice of macroeconomic policy worldwide, inflation targeting and the floating exchange rate regime are perfectly compatible with the use of a wide range of instruments enhancing financial stability, including capital flow management measures. However, large-scale capital controls, basically, can only have a temporary stabilising effect. Over time, they are not only becoming less efficient, but also entail adverse long-term consequences for economic growth.
There are multiple factors that emerged in 2022 and considerably impact the implementation of monetary policy, including in the medium term. The factors that have the strongest influence are as follows:
- blocking of a part of the Bank of Russia’s gold and foreign currency reserves and a range of private assets;
- introduction of cross-border capital controls;
- accelerated transition to payments in national currencies; and
- suspension of the fiscal rule.
As a result of the sanctions, it became impossible to conduct operations in the foreign exchange market within fiscal rule-based operations carried out by Russia’s Ministry of Finance. Furthermore, the Ministry of Finance suspended certain provisions of the fiscal rule associated with using extra oil and gas revenues and planning the maximum amount of federal budget expenditures. The situation in the Russian economy required a considerable easing of fiscal policy, and federal budget expenditures exceeded the maximum level provided for by the parameters of the fiscal rule effective as of early 2022.
Beginning from 2023, the Ministry of Finance will start to gradually normalise fiscal policy. This process will take into account the approved modified parameters of the fiscal rule and complete in 2025. Currently, various options of its modification are under discussion. Among other things, the authorities study the possibility to implement the operational mechanism of the fiscal rule for replenishing (or spending) the resources of the National Wealth Fund in the currencies of friendly states. The Bank of Russia supports the development of new principles of the fiscal rule considering the changed conditions. This will make it possible to restore its stabilising effect on domestic demand and public finance, which will help achieve the goal of monetary policy.
In the context of macroeconomic policy, the concept of a long-term equilibrium in the economy is widely applied worldwide. A long-term equilibrium does not imply any specific point, but rather a steady path of economic development. Within the inflation targeting strategy in a long-term equilibrium, consumer prices rise at a pace conforming to the inflation target, and economic growth rates are equal to potential and determined by the growth rate of production factors and the pace of technological advancement. Various internal and external cyclical shocks might cause a short-term deviation of the economy from its equilibrium which is called a gap.
Economic publications most often refer to the output gap. This is a non-observable variable showing how much actual output has deviated from potential output. As the output gap is a non-observable variable, the uncertainty about the accuracy of its estimates is taken into account in the course of the implementation of monetary policy.
An important factor of the performance of the Russian credit market is preferential lending programmes primarily providing for subsidising interest rates on loans. Generally, interest rates on subsidised loans do not depend on monetary policy, easing monetary conditions in the economy and distorting the functioning of the interest rate channel of the transmission mechanism. Practical experience has proven that these programmes can be efficient for supporting lending to small groups of socially important borrowers (regional or sectoral) or promoting the restoration of demand during economic downturns (provided that these programmes are ended after their goals are achieved). However, the wider is the range of borrowers and the longer is the period of a subsidised lending programme, the greater macroeconomic imbalances it might cause. Consequently, all else being equal, this might require a tighter monetary policy to maintain inflation close to the target.
The foreign sanctions imposed in early 2022 and the adopted response measures in the form of cross-border capital controls significantly reduced the dependence of the Russian financial system on the external environment. This in turn has changed the view of how to respond to shocks of various nature through monetary policy measures and how these decisions affect the economy. In other words, the monetary policy transmission mechanism has altered. The main change in the monetary policy transmission mechanism is related to the functioning of the foreign exchange channel: its role has notably decreased, which the Bank of Russia takes into account when implementing its monetary policy.
The transfer curve is a set of internal uniform transfer interest rates for operations of various terms set by a commercial bank. The transfer curve is the core of the system of banking products pricing that enables banks to determine a coherent range of prices for operations in various market segments and, when needed, to flexibly adjust the structure of their balance sheets by choosing between various sources of funding and investments. There is no such thing as a uniform transfer curve for the entire banking sector. Each bank builds its individual curve based on the yield curves of market instruments with minimum risk or, where necessary, relying on its internal assessment
The variety of cause and effect relationships, through which key rate changes influence demand and prices, is referred to as the monetary policy transmission mechanism (MPTM), and individual chains of its cause and effect relationships are called transmission mechanism channels. The dramatic changes of 2022 have significantly affected the functioning of the MPTM. The performance of the credit and balance sheet channels has been constrained due to the overall decrease in banks’ risk appetite amid elevated uncertainty. In March—April, the welfare channel did not function due to the impossibility to conduct transactions with securities. The importance of the foreign exchange channel has significantly declined. The influence of the key rate on the ruble exchange rate is slow and weak. The impact of the external trade environment on the ruble exchange rate has strengthened. The efficiency of the expectations channel has decreased amid uncertainty and the structural transformation of the economy complicating the estimates of economic prospects. The interest rate channel is the one that remains fully effective.
The inflation indicator that is stipulated in the Bank of Russia’s monetary policy goal is the annual growth of the Consumer Price Index. Furthermore, there are many other indicators of inflation trends used for analysis. Assessments of current price dynamics may rely on the monthly price growth index. It has notable seasonal fluctuations, due to which this figure is seasonally adjusted in analysis. The trend component of inflation is characterised by underlying inflation, as well as indices excluding individual volatile categories (e.g., inflation excluding vegetables, inflation excluding petrol, core inflation, etc.).
The factors of inflation that are beyond the influence of the Bank of Russia’s monetary policy measures are called non-monetary. In 2022, their number was especially large. Post-coronavirus effects include persistent supply shocks associated with the processes of production disintegration and market segmentation, among other things. After February, these effects for Russia have intensified because many of the interrupted production and logistics chains were completely broken.
To provide a comprehensive analysis of its monetary policy, the Bank of Russia carried out a quantitative analysis of reasons for the inflation deviation from the 4% target over the period of
The level of households’ inflation expectations that had already risen during the pandemic increased even more in March 2022. This was provoked by the drastic weakening of the ruble and the unprecedented surge in uncertainty. After peaking in March, inflation expectations then started to edge down, decreasing to 10.8% by July 2022, which is below the level of July 2021. However, given that inflation expectations are still weakly anchored, their current decrease might be unsteady. Companies’ price expectations for the next three months also considerably increased in March 2022, reaching the maximum level on record — since January 2000. Nonetheless, already in April—July 2022, businesses’ price expectations started to go down and nearly returned to the level of early 2021. The decrease in companies’ price expectations was associated with a slower rise in costs, including because of a stronger ruble and subdued demand.
The Bank of Russia carries out regular surveys of companies. Executives of over 14,000 enterprises in all Russian regions take part in this monitoring for over twenty years. In May 2022, the Bank of Russia started to publish its monthly Business Climate Index calculated based on the surveys.
The Bank of Russia continues to develop the digital ruble which is the third, new form of the Russian ruble, in addition to the cash and non-cash forms. In terms of its features, the digital ruble will be similar to both cash and balances in bank accounts. Digital rubles, just as cash, will be the Bank of Russia’s obligation. However, the Bank of Russia will issue them only in the digital form which is also typical of banks’ non-cash funds. The introduction of the digital ruble will ensure a number of benefits, namely better financial inclusion, including in remote and scarcely populated areas, the possibility to access a digital wallet via any financial institution and despite limited access to the internet, as well as the development of new payment infrastructure. The key advantage is that the third form of the Russian ruble will help optimise the cost of settlements. This will reduce transaction costs and support the competitiveness of the Russian economy.
Currently, 47 countries pursue their monetary policy within the inflation targeting strategy. According to assessments as of 2021, these countries account for approximately 70% of global GDP. The decade after the
The Bank of Russia calculates the monetary programme indicators in addition to the banking sector liquidity forecast and includes them in the forecast figures taken into account in the course of the development and implementation of the Bank of Russia’s monetary policy.