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On 23 July 2021, the Bank of Russia Board of Directors decided to increase the key rate by 100 b.p., to 6.50% per annum. According to the Bank of Russia’s estimates, the Russian economy reached its pre-pandemic level in 2021 Q2. The contribution of persistent factors to inflation increased due to faster growth of demand compared to output expansion capacity. Taking into account high inflation expectations, this has significantly shifted the balance of risks towards proinflationary ones and may cause inflation to deviate upwards from the target for a longer period. The key rate decision taken aims to constrain this risk and to return inflation to 4%.

 

If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increase 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 reach 5.7-6.2% in 2021. 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 June, seasonally adjusted consumer price growth slowed down slightly compared to May, remaining elevated. Annual inflation grew to 6.5% (vs 6.0% in May) and, according to estimates as of 19 July, remained unchanged. Based on Bank of Russia estimates, indicators reflecting the most sustainable price movements substantially exceed 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 transfer higher costs to prices.

Inflation expectations of households continue to grow, remaining close to their highest level for the last four years 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 deviation of inflation upwards from the target. The key rate decision taken aims to constrain this risk and to return annual inflation to 4%. According to the baseline scenario, annual inflation will reach 5.7-6.2% in 2021. 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.

Monetary conditions remain accommodative given elevated inflation expectations and actual inflation. In this context, lending continues to grow at rates close to recent years’ highs. Yields of short-term OFZs rose, reflecting the expectations of a faster-than-expected key rate hike by the Bank of Russia. A trend towards growth in loan and deposit interest rates is also emerging, with growth in deposit rates taking place at a slower pace so far. Today’s decision of the Bank of Russia will speed up the adjustment of bank interest rates to the monetary policy pursued. 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. According to the Bank of Russia’s estimates, the Russian economy reached its pre-pandemic level in 2021 Q2. High-frequency indicators point to steady growth of consumer and investment demand. As estimated by the Bank of Russia, consumer activity has already exceeded its pre-pandemic levels. Despite a partial tightening of restrictions, the household services sector continues to recover actively.

Inflation pressure from the labour market intensifies. Demand for labour force is growing in a wide range of industries, with certain sectors experiencing a deficit in part due to remaining restrictions on the inflow of labour migrants.

The Russian economy is also supported by external demand demonstrating a robust growth. However, supply-side limitations in the global economy have exacerbated. In this context, prices in global commodity markets remain close to multi-year highs despite the downward adjustment in June—July.

Taking into account the situation in the Russian and global economy as well as the July OPEC+ decision to expand oil production, the Bank of Russia forecasts Russian GDP growth of 4.0–4.5% in 2021. According to the Bank of Russia’s forecast, in 2022–2023, the Russian economy will grow 2.0–3.0% annually. Over a mid-term horizon, domestic demand trends will largely depend on further growth rates of consumer and investment demand. Consumer demand will be supported by household income growth and lending. Domestic demand will be influenced by the process of fiscal policy normalisation in view of the announced additional social and infrastructural measures. External demand movements will be mostly dependent on the pace of vaccination and the normalisation of the epidemic situation world-wide.

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.

Inflationary pressures may originate from a stronger-than-expected decline in households’ propensity to save, propelled by the combination of low interest rates and growing prices. Further upward pressure on prices may continue to come from remaining disruptions in production and supply chains, as well as structural changes in the labour market as a result of the pandemic. Proinflationary risks are still generated by price movements in global commodity markets. However, they have somewhat declined as prices for certain goods started to go down in June and July. Further movements of 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. 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. Subsequent economic growth 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 for 2021 and the 2022–2023 Planning Period, which assumes a return to fiscal rule parameters in 2022. The Bank of Russia’ forecast will also factor in the impact of the 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 will consider the necessity of further key rate increase 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 10 September 2021. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.

In the follow-up to the Board of Directors meeting of 23 July 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 on 23 July 2021

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