On 17 March 2023, the Bank of Russia Board of Directors decided to keep the key rate at 7.50% per annum. Current rates of price growth remain moderate, including in the stable components of inflation. Inflation expectations of households are down significantly but remain elevated, as do businesses’ price expectations. High-frequency data suggest that a recovery in business and consumer activity is ongoing. Accelerating fiscal spending, deteriorating terms of foreign trade and the situation in the labour market continue to pose pro-inflation risks. The overall balance of inflation risks has remained essentially the same since the previous Board meeting.
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. If pro-inflation risks intensify, the Bank of Russia will consider the necessity of key rate increase in the key rate at its upcoming meetings. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will come in at
Inflation movements. Annual price growth in February was down to 11.0% (from 11.8% in January). Since the beginning of 2023, the average rate of current price growth has held close to 4% in annual terms and above the average for the fourth quarter of 2022. At the same time, current price growth in February decelerated relative to January. This was in part due to its volatile components. The weakening of the ruble since late 2022 has so far shown little in price movements. In the stable components of inflation, current price growth rates remain moderate.
Inflation expectations of households and price expectations of companies remain elevated. At the same time, inflation expectations of households have declined significantly in March. Analysts’ medium-term inflation expectations are anchored close to 4%.
The Bank of Russia forecasts that annual inflation will temporarily fall below 4% in the coming months under the influence of last year’s high base effect. At the same time, sustained inflationary pressure will gradually increase from moderately low levels. According to the baseline scenario, given the monetary policy stance, annual inflation will come in at
Monetary conditions have remained broadly neutral. Since the previous key rate meeting of the Board, OFZ yields and credit and deposit market rates have been essentially unchanged. Despite a slowdown in early 2023, credit activity has been high overall, primarily in the corporate segment. Households’ and businesses’ funds in current accounts and bank deposits have increased, with fiscal spending still a meaningful contributor to this growth.
For all the elevated inflation expectations and ongoing improvements in consumer sentiment, Russian consumers have sustained a cautious stance. This is reflected in the high propensity to save and the increased share of liquid assets (current accounts and ruble cash) in the savings structure.
Economic activity. In 2022, GDP declined 2.1%, which is better than the February estimate by the Bank of Russia. High-frequency data for the first quarter of 2023 show that economic activity continues to pick up. Growing domestic demand is supporting an improvement in business sentiment despite some deterioration of the external environment.
However, the current capacity to expand production in the Russian economy is largely limited by the labour market. Unemployment dropped to a new low. Labour shortages are increasing in many industries amid the effects of the partial mobilisation as growth in businesses’ demand for labour continues. In these circumstances, productivity growth can lag behind real wage growth.
Changes in the aggregate demand structure continue amid the structural transformation of the economy. Consumer demand is gradually recovering but remains subdued overall. Investment demand in the private sector is slowing down amid growing government investment. Overall, the contribution of fiscal policy to the expansion of aggregate demand is still increasing.
Inflation risks. The medium-term balance of risks has not significantly changed, remaining tilted towards pro-inflation risks.
Meaningful pro-inflation risks are related to geopolitical tensions that affect foreign trade terms. A strengthening in foreign trade and financial restrictions can further weaken demand for Russian exports, contributing to inflation growth through exchange rate movements. Moreover, the increasing complexity of production and supply chains and payments due to external restrictions could lead to both higher import prices and tighter supply-side constraints in the Russian economy. Additionally, a deterioration in the global economic growth outlook can also come as a significant short-term inflation driver amid instability in the financial markets of advanced economies.
The Bank of Russia’s baseline scenario rests on the decisions already made regarding the
Pro-inflation risks from the labour market persist. Labour shortages in some sectors may lead to labour productivity growth lagging behind growth in real wages.
High and unanchored inflation expectations, which are particularly sensitive to exchange rate fluctuations, are also a source of risk. Under these conditions, the continuing growth of the most liquid assets in the structure of household savings may spur a rise in consumer demand in the future.
A disinflationary risk for the baseline scenario is the continued high propensity of households to save amid increased general uncertainty as households take time to adapt to a new supply structure in consumer markets. A growing risk premium in bond yields and lending rates may further tighten monetary conditions, which will restrain lending in the economy. A more rapid adaptation of the economy, accompanied by an active recovery of imports among other things may also have a disinflationary effect.
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 risks posed by domestic and external conditions and the reaction of financial markets. If pro-inflation risks intensify, the Bank of Russia will consider the necessity of key rate increase at its upcoming meetings.
The Bank of Russia Board of Directors will hold its next rate review meeting on 28 April 2023. 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 March 2023
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