On 11 February 2022, the Bank of Russia Board of Directors decided to increase the key rate by 100 b.p. to 9.50% per annum. Inflation is developing appreciably above the Bank of Russia’s October forecast. Expanding demand continues to exceed the capacity to build up output. Given the limited nature of available labour resources, the rapid recovery of economic activity exacerbates inflationary pressure. The situation in the global commodity markets remains proinflationary. Inflation expectations do not decline so far, hitting multi-year highs. In this environment, the balance of risks has tilted even more towards proinflationary ones. The Bank of Russia’s monetary policy stance is aimed to 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 increase at its upcoming meetings. Key rate decisions will be made taking into account actual and expected inflation movements 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. Based on the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will reduce to
Inflation movements. Inflation is developing appreciably above the Bank of Russia’s October forecast. In January, monthly seasonally adjusted pace of growth in consumer prices picked up again after dropping in December, though staying below the peak values of the 2021 autumn. Annual inflation in January climbed to 8.7% (vs 8.4% in December 2021). It is estimated at 8.8% as of 4 February.
Based on Bank of Russia estimates, indicators characterizing the most sustainable price movements substantially overshoot 4% (annualised). This 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 prices, on to consumers. Moreover, further expansion in industrial output is limited by growing labour shortages.
Price growth inertia is intensified by high and unanchored inflation expectations of households and businesses. In January, households’ inflation expectations slightly abated, though remaining close to six-year highs. Recent data indicate that business price expectations are growing, reaching new multi-year highs. Analyst expectations for 2022 have increased, but are anchored near 4% for the medium term.
The dominating influence of inflationary factors has led to a more substantial and prolonged upward deviation of inflation from the target. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will reduce to
According to Bank of Russia estimates, monetary conditions have changed from accommodative to neutral ones. At present, growing actual inflation and high inflation expectations are constraining their transition to tight territory. Since the previous meeting of the Bank of Russia Board of Directors, yields of short-term OFZs rose, mostly reflecting the market’s expectations for the key rate path. Yields on medium- and long-term OFZs have also increased mainly due to elevated geopolitical tensions. Credit and deposit rates continue to grow. At the same time, rising nominal interest rates has not yet ensured a sufficient increase in the propensity to save and more balanced lending dynamics. The inflow of funds to fixed-term ruble deposits is moderate. At the same time, both retail and corporate lending markets maintain high activity.
The Bank of Russia’s monetary policy stance will accelerate the formation of tight monetary policy stance needed to return inflation to the target and limit the influence of the currently high inflation on long-term interest rates. This will solidify a trend towards the growing appeal of household deposits, protect the purchasing power of savings and ensure balanced growth of lending and the economy in general.
Economic activity. According to Bank of Russia estimates, in 2021 Q4, the Russian economy noticeably deviated upwards from the balanced growth path. Rapid growth in lending, rising real wages and households’ moderate propensity to save, driven by high inflation expectations, support expansion in consumer activity, especially in non-food markets. Growing domestic and external demand and high corporate profits shore up investment activity.
Supply-side constraints in the Russian economy are associated not only with temporary problems such as interruptions in production and supply chains, but also with more sustainable factors. This primarily concerns the labour market. Demand for labour force continues to grow in many industries. At the same time, labour shortages are emerging in many sectors, despite the inflow of foreign labour. Unemployment is at its record lows, whereas the number of openings was the highest on record. The state of the labour market suggests that a further increase in steady growth rates of the Russian economy will be conditional primarily on the growth paces of labour productivity.
In accordance with the updated baseline forecast, GDP is projected to grow
Inflation risks. The balance of risks has further shifted towards proinflationary risks. The effect of proinflationary factors may be intensified by elevated inflation expectations and corresponding secondary effects.
Inflation slowdown may be hampered by slower than expected in the baseline scenario normalisation of production and logistics chains, labour shortages, as well as structural changes in the labour market caused by the pandemic. More massive staff shortages may cause labour productivity growth to lag behind wage growth.
Due to the active growth of demand in the global economy, proinflationary risks associated with price trends in global commodity markets increased. This primarily concerns energy commodities and food markets.
Short-term proinflationary risks associated with volatility in global financial markets caused by, among other factors, various geopolitical events, intensified, which may affect exchange rate and inflation expectations. Given further intensification of inflationary pressure in the world economy, the central banks of advanced economies are forced to implement a faster normalisation of monetary policy. This may become an additional source of higher volatility in global financial markets, especially in emerging markets.
Disinflationary risks for the baseline scenario remain moderate, being largely linked to the pace and extent at which supply is adjusting to growing demand. A faster — relative to the baseline scenario — normalisation of production and logistics chains in the Russian and global economies may become another source of downward pressure on prices. The opening of borders as restrictive measures are lifted may restore the consumption of foreign services.
Medium-term inflation is largely impacted 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 also factors in decisions made by the Government of the Russian Federation to invest the liquid part of the National Wealth Fund.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate increase at its upcoming meetings. Key rate decisions will be made taking into account actual and expected inflation movements relative to the target, economic developments over the forecast horizon as well as risks posed by domestic and external conditions and the reaction of financial markets.
In the follow-up to the Board of Directors meeting of 11 February 2022 the Bank of Russia released its medium-term forecast.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 18 March 2022. The Board decision press release is to be published at 13:30 Moscow time.
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