On 10 February 2023, the Bank of Russia Board of Directors decided to keep the key rate at 7.50% per annum. Current price growth rates are increasing, remaining moderate in terms of sustainable components. Inflation expectations of households and businesses edged down but remain elevated. Economic activity trends evolve better than the Bank of Russia’s October forecast. Although households’ consumer behaviour is still cautious, there appear signs of recovery in consumer activity. Accelerating fiscal spending, deteriorating terms of foreign trade and situation in the labour market intensify pro-inflation risks.
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. According to the Bank of Russia’s forecast, given the current monetary policy stance, annual inflation will come in at
Inflation movements. As of 6 February, annual inflation is 11.8% after 11.9% in December 2022. Current price growth rates are increasing, having accelerated since the beginning of 2023. Higher inflationary pressures are in part due to volatile components, especially fruit and vegetable prices, and also the weakening of the ruble in late 2022. In terms of stable components, however, the current price growth rates remain moderate.
Inflation expectations of households and price expectations of enterprises edged down but remain elevated. At the same time, business price expectations declined in January for the first time after several months of growth. Analysts’ inflation expectations for 2023 have increased slightly, but are anchored close to 4% for the medium term.
The Bank of Russia forecasts that in the coming months, annual inflation will temporarily fall below 4% under the influence of last year’s high base effect. At the same time, the sustainable 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 remained broadly neutral. Since the previous key rate review meeting of the Bank of Russia Board of Directors OFZ yields have risen and the slope of the OFZ curve has increased. This largely points to the expansion of the government borrowing programme. At the same time, credit and deposit rates have remained almost unchanged. Credit activity has been high overall, especially in the mortgage and corporate sectors. Households’ and businesses’ funds in current accounts and bank deposits have increased. At the end of 2022, an increase in budget expenditures made a significant contribution to the growth of current accounts.
Overall, despite higher inflation expectations and a certain improvement in consumer sentiment, households remain cautious in their consumer behaviour. 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. As estimated by the Bank of Russia, 2022 GDP decreased by 2.5%. In late 2022 and early 2023, flash data suggest that business and consumer activity trends, as well as those of foreign trade, are evolving better than forecast by the Bank of Russia in October.
At the same time, at present, the capacity to expand production in the Russian economy is largely limited by the labour market situation. Unemployment continues to be close to its all-time low. Labour shortages are increasing in many industries amid the effects of the partial mobilisation and a general increase in corporate demand for labour force. Under these conditions, labour productivity growth may lag behind real wage growth.
During the structural transformation of the economy, the structure of aggregate demand continues to change. Consumer demand remained subdued at the end of 2022, but, from the beginning of 2023, it has been showing signs of recovery amid improving consumer sentiment. The slowdown in private sector investment demand is evolving simultaneously with growing government investment. Accelerating fiscal spending increases the contribution of fiscal policy to the expansion of aggregate demand.
Taking into account the ongoing structural transformation of the Russian economy, the Bank of Russia’s baseline scenario forecasts the growth of GDP at (-1.0)-(+1.0)% in 2023 and
Inflation risks. The medium-term balance of risks remains tilted towards pro-inflation risks. Short-term pro-inflation risks have increased again and still prevail over disinflationary risks.
A slowdown in the global economy and a further escalation of external trade and financial restrictions may weaken foreign demand for Russian exports and have a pro-inflation effect via exchange rate dynamics. In turn, the negative effect of the existing external restrictions on the Russian economy’s potential may prove to be stronger, which is also a significant pro-inflation risk.
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 the labour productivity growth lagging behind the growth of 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 increased 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 well as the duration of households’ adaptation to a new supply structure in consumer markets. A growing risk premium in bond yields and lending rates may additionally 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.
In the follow-up to the Board of Directors key rate meeting of 10 February 2023 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 17 March 2023. The press release on the Bank of Russia Board decision is to be published at 13.30 Moscow time.
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