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On 23 April 2021, the Bank of Russia Board of Directors decided to increase the key rate by 50 bp to 5.00% per annum. Consumer price growth rates as well as inflation expectations of households and businesses remain elevated. The recovery of demand is becoming increasingly steady and in certain sectors exceeds their output expansion capacity. In this context, the balance of risks is shifted towards proinflationary ones. The Bank of Russia’s inflation forecast for 2021 has been increased to 4.7–5.2%.

The rapid recovery of demand and elevated inflationary pressure call for an earlier return to neutral monetary policy. The Bank of Russia will consider the necessity of further increases in the key rate at its upcoming meetings. The 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. Given the monetary policy stance, annual inflation will return to the Bank of Russia’s target in the middle of 2022 and will remain close to 4% further on.

Inflation dynamics. Inflation continues to develop above the Bank of Russia’s forecast. In March, the annual consumer price growth rate rose to 5.8% (vs 5.7% in February). According to estimates as of 19 April, annual inflation slowed down to 5.5%. However, this is related to the high base effect of April 2020. Based on Bank of Russia’s estimates, indicators reflecting the most sustainable price movements rose in March and substantially exceed 4% (annualised).

This largely reflects a steady nature of the recovery in domestic demand. Its influence on price growth rates is enhanced by supply-side restrictions and the elevated pressure from businesses’ costs. Amid the restrictions on foreign travels, the funds that households have been unable to spend for this purpose are partially redistributed in favour of domestic goods and services consumption.

Inflation expectations of households remain elevated compared to the pre-pandemic period. Businesses’ price expectations have grown. Analysts’ medium-term expectations are anchored close to 4%.

The rapid recovery of demand and elevated inflationary pressure call for an earlier return to neutral monetary policy. The Bank of Russia forecasts that the annual consumer price growth rates in the second quarter will be close to their first quarter values. Annual inflation is forecast to slow down steadily in the second half of 2021. Inflation will be in the range of 4.7–5.2% as of the end of 2021. Given the monetary policy stance, annual inflation will return to the Bank of Russia’s target in the middle of 2022 and will remain close to 4% further on.

Monetary conditions remain accommodative and have not seen any significant changes since the previous meeting of the Bank of Russia Board of Directors. Yields of medium- and long-term OFZs remain near their late-March levels, reflecting the expectations of the Bank of Russia’s return to neutral monetary policy and the movements of interest rates in global financial markets. Lending continues to grow at rates close to recent years’ highs. The Bank of Russia’s decisions to increase the key rate and the rise in OFZ yields observed since the beginning of the year will create the prerequisites for the growth in loan and deposit rates in the future. This will make it possible to raise the attractiveness of bank deposits for households, protect the purchasing power of savings, and ensure balanced lending expansion.

Economic activity. The pace of economic recovery is becoming increasingly steady. At the end of the first quarter, retail turnover approached its pre-pandemic level. The household services sector is actively recovering. This is facilitated by the consistent lifting of restrictive measures and gradual vaccination. According to the Bank of Russia’s monitoring, over a half of the surveyed companies have reported that the demand for their products has recovered or exceeded the pre-pandemic levels. Investment demand recovery is ongoing. In certain sectors, the capacity for output expansion is lagging behind the expanding demand, including due to lack of labour force. The unemployment is declining.

Economic recovery is also supported by external demand which continues to grow despite the still complex epidemic conditions in the world.

The Bank of Russia forecasts the growth rate of the Russian economy in 2021 in the range of 3.0–4.0%. It means that the Russian economy will return to its pre-crisis level in the second half of 2021. According to the Bank of Russia’s forecast, GDP in 2022–2023 is set to grow 2.5–3.5% and 2.0–3.0% respectively.

The medium-term path of economic growth will largely depend both on domestic and external conditions. Domestic demand movements will be predominantly shaped by the rate of growth in private demand. Consumer demand will be supported by a decline in households’ propensity to save along with an increase in incomes and lending. Domestic demand will be also influenced by the process of fiscal policy normalisation in view of the announced additional social and infrastructure measures. External demand movements will be mostly dependent on fiscal support measures taken in individual advanced economies as well as the pace of vaccination world-wide.

Inflation risks. The balance of risks is shifted towards proinflationary risks. The impact of proinflationary factors may be more prolonged and pronounced amid an outrunning growth of consumer demand compared to the capacity of output expansion. Their effect may be also strengthened by elevated inflation expectations and corresponding secondary effects.

Further upward pressure on prices may continue to come from temporary disruptions in production and supply chains. Proinflationary risks are generated by price movements in global commodity markets, including supply-side factors. This may pass through to domestic prices for corresponding goods. At the same time, further movements of food prices will largely depend on the agricultural harvest prospects 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. Also, given that the global economic recovery is progressing at faster paces than previously expected and the need is no longer in place for unprecedentedly accommodative policies in advanced economies, an earlier monetary policy normalisation in these countries is possible. This may become a further driver of volatility growth 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. The economic recovery may be held back, among other things, by 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 for 2021 and the 2022–2023 Planning Period, which implies a return to the fiscal rule parameters in 2022. The Bank of Russia will factor in the impact of possible decisions on investing the liquid part of the National Wealth Fund in excess of the threshold level set at 7% of GDP on the forecast.

The Bank of Russia estimates that the implementation of additional social and infrastructure measures announced in the Presidential Address to the Federal Assembly in April will not exert any considerable proinflationary effect.

The Bank of Russia will consider the necessity of further increases in the key rate at its upcoming meetings. The 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 11 June 2021. The Board decision press release is to be published at 13:30 Moscow time.

In the follow-up to the Board of Directors meeting of 23 April 2021 the Bank of Russia released its medium-term forecast.

 

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 23 April 2021

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Last updated on: 2021-04-23T13:30:00.593