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On 10 September 2021, the Bank of Russia Board of Directors decided to increase the key rate by 25 b.p. to 6.75% per annum. In 2021 Q2, the Russian economy reached its pre-pandemic level and is, according to Bank of Russia estimates, returning to a balanced growth path. 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 high inflation expectations, the balance of risks for inflation is tilted to the upside. This may bring about a more sustained 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 rises at its upcoming meetings. Key rate decisions will take into account actual and expected inflation dynamics 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. According to the Bank of Russia’s forecast, annual inflation will begin to slow down in 2021 Q4. Given the monetary policy stance, annual inflation will edge down to 4.0-4.5% in 2022 and will remain close to 4% further on.

Inflation dynamics. Inflation is developing above the Bank of Russia’s forecast. In August, monthly consumer price growth (seasonally adjusted) was up again, after a slowdown in July. Annual inflation rose to 6.68% (vs 6.46% in July). According to an estimate as of 6 September, it is 6.74%. Based on Bank of Russia estimates, indicators reflecting the most sustainable price movements are persistently above 4% (annualised).

This largely reflects the fact that steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors. In this context, businesses find it easier to pass higher costs, including on the back of rising global commodity markets, on to prices.

Inflation expectations of households have held close to their four-year highs for more than six months. Businesses’ price expectations remain near their multi-year highs. Analysts’ medium-term expectations are anchored close to 4%.

The dominating influence of proinflationary factors could lead to 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 annual inflation to 4%. According to the baseline scenario, annual inflation will begin to slow down in 2021 Q4. It is forecast to edge down to 4.0-4.5% in 2022 and will remain close to 4% further on.

Monetary conditions have slightly tightened. Yields of short-term OFZs have risen, reflecting expectations for the Bank of Russia to raise the key rate. Yields of medium- and long-term OFZs have remained steady. Loan and deposit rates are rapidly adjusting to the March-July key rate hikes. The outflow of funds from fixed-term ruble deposits has stopped. At the same time, corporate lending is continuing to grow at rates close to recent years’ highs. Growth in mortgage lending slowed down following changes in the parameters of subsidised programmes. Consumer lending is still growing at high paces. The Bank of Russia’s monetary policy stance will make it possible for bank deposits to become more attractive to households, will protect the purchasing power of savings and ensure balanced expansion in lending.

Economic activity. The Russian economy reached its pre-pandemic level in 2021 Q2. High-frequency estimates suggest that economic activity continued to grow in Q3 albeit at a somewhat slower pace. Based on Bank of Russia estimates, this is largely associated with the return of the Russian economy to a balanced growth path. At the same time, economic trends are diverse across industries and regions.

Growth in real wages and households’ low propensity to save, driven by high inflation expectations, support growth in consumer activity, especially in non-food markets. At the same time, the recovery of the commercial services sector decelerated between July and August due to partially tightened anti-pandemic measures. Growing domestic and external demand and high corporate profits shore up investment activity.

Inflationary pressure from the labour market is intensifying. Demand for labour is growing in many industries. At the same time, some sectors show labour shortages, including due to remaining restrictions on the inflow of foreign labour. The unemployment rate is close to its record lows, while the number of vacancies is at its record highs. The state of the labour market suggests that a further increase in steady growth rates of the Russian economy will primarily be conditional on the growth paces of labour productivity.

Inflation risks. The balance of risks remains significantly shifted towards proinflationary ones. Their effect may be strengthened by elevated inflation expectations and corresponding secondary effects.

Further proinflationary pressure may be caused 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 considerably lag behind wage growth.

Proinflationary risks remain to be generated by price movements in global commodity markets. Further changes in food prices will largely depend on agricultural harvest in 2021 both in Russia and abroad.

Short-term proinflationary risks are also associated with the stronger volatility in global markets caused in part by various geopolitical developments, which may affect exchange rate and inflation expectations. As the global economic recovery is progressing faster and, therefore, the need is no longer in place for unprecedented accommodative policies in advanced economies, earlier monetary policy normalisation in these countries is possible. This may become an additional source of higher volatility in global financial markets.

Disinflationary risks for the baseline scenario remain moderate. Opening up the borders concurrently with a gradual lifting of restrictions may lead to a recovery in the consumption of foreign services and weaken supply-side constraints in the labour market owing to an inflow of foreign labour force. Further economic recovery may be held back by, among other things, low vaccination rates and the spread of new coronavirus strains, as well as the ensuing tightening of restrictions.

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 will also factor in decisions to invest the liquid part of the National Wealth Fund in excess of the threshold level of 7% of GDP.

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings. Key rate decisions will take into account actual and expected inflation dynamics 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 rate review meeting on 22 October 2021. 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 10 September 2021

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Last updated on: 2021-09-10T13:30:00.273