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On 12 February 2021, the Bank of Russia Board of Directors decided to keep the key rate at 4.25% per annum. In December and January, prices continued to grow at an elevated pace. Demand is recovering faster and more sustainably than expected. At the same time, supply-side restrictions are still in place and continue to exert upward pressure on prices. Inflation expectations of households and businesses remain elevated. Accelerated vaccination rates, as well as expectations of additional fiscal support measures in certain countries, contribute to the growth of prices in financial and commodity markets. In this context, disinflationary risks no longer prevail over a one-year horizon, and the Bank of Russia has increased its 2021 inflation forecast to 3.7–4.2%. Moving forward, given the current monetary policy stance, annual inflation will stay close to 4%.

If the situation develops in line with the baseline forecast, the Bank of Russia will determine the timeline and pace of a return to neutral monetary policy taking into account the still high heterogeneity of current economic and price movement trends, actual and expected inflation dynamics 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.

Inflation dynamics. Inflation is developing above the Bank of Russia’s forecast. In January, the annual consumer price growth rate rose to 5.2% vs 4.9% in December. This is largely related to the growth in prices in global commodity markets and the continuing pass-through of the ruble’s earlier weakening to prices. These factors may exert more prolonged influence due to the previous growth in households’ and businesses’ inflation expectations and remaining supply-side restrictions. Government measures constrained the growth of prices for certain goods. According to Bank of Russia estimates, current consumer inflation indicators reflecting the most sustainable price movements are close to 4% (annualised).

Inflation expectations of households have abated; however, they still remain elevated compared to the pre-pandemic period. This is largely related to the increase in prices for certain everyday goods and exchange rate volatility. Inflation expectations of businesses have not changed materially after growing over previous months. Analysts’ inflation expectations for 2021 and the medium term are anchored close to 4%.

The restraining influence of domestic demand on price movements is weakening amid continuing inflationary pressure of enterprise costs. Such supply-side proinflationary factors as a labour force shortage in certain spheres and additional costs of businesses to comply with anti-epidemic requirements are becoming more noticeable. If these factors continue to exert their influence over the coming quarters, inflation might return to the Bank of Russia’s target slower than expected.

According to the Bank of Russia’s forecast, annual inflation will peak in February-March and decline later on. The path of this decline will be determined by the timing of exhaustion of the effect of proinflationary factors and 2020 base effects. The baseline scenario assumes that, given the current monetary policy stance, annual inflation will reach 3.7–4.2% in 2021 and remain close to 4% later on.

Monetary conditions remain accommodative and have not changed substantially since the previous meeting of the Bank of Russia Board of Directors. OFZ yields grew somewhat amid rising inflation expectations, climbing long-term interest rates in global financial markets, and remaining geopolitical tensions. Accelerated vaccination rates, as well as expectations of additional fiscal support measures in certain countries, contribute to the growth of prices in financial and commodity markets. Loan and deposit rates mainly remained unchanged. At the same time, higher price growth and inflation expectations over recent months mean that price lending conditions have slightly eased in real terms. In certain segments, banks continued to ease non-price lending conditions as well. In this context lending expansion continued. Alongside with accommodative monetary conditions, lending dynamics are influenced by the preferential programmes implemented by the Government as well as by regulatory relaxations. When making its key rate decisions, the Bank of Russia will assess the impact of cancelling these anti-crisis measures on monetary conditions.

Economic activity. In 2020, GDP fell by 3.1%. This is less than the Bank of Russia expected earlier. According to the Bank of Russia’s estimates, economic recovery also continued in 2020 Q4. The constraining effect of the worsening epidemic situation on the economy in Russia and worldwide was much less than expected. This is related to the targeted nature of restrictive measures and the significant adaptation of households and businesses to the new conditions. In 2020 Q4, households’ real income continued to recover and unemployment started to decline.

High-frequency indicators of economic activity suggest that the economic recovery in early 2021 is ongoing. The paces of recovery are set to gain support from better consumer and business sentiment in the context of partially lifted restrictive measures and coronavirus vaccination coverage.

The Bank of Russia forecasts the recovery growth of the Russian economy in 2021 in the range of 3.0–4.0%. However, the scale of this recovery will continue to vary markedly across sectors. According to the Bank of Russia forecast, GDP in 2022–2023 is set to grow 2.5–3.5% and 2.0–3.0% respectively. The medium-term economic growth path will be largely influenced by further coronavirus pandemic developments in Russia and globally, the nature of the recovery of private demand in the context of potential change in consumer and business behaviour, as well as by the path of budget consolidation. Accommodative monetary policy will continue to support the economy throughout 2021.

Inflation risks. Disinflationary risks no longer prevail over the horizon of 2021. The impact of proinflationary factors may prove more protracted and pronounced against the backdrop of a faster recovery in demand as well as previous growth in inflation expectations and the associated secondary effects.

Upward pressure on prices may be caused by temporary disruptions in production and supply chains in the post-restriction period, as well as by additional corporate costs of protecting staff and consumers from the spread of the pandemic. Proinflationary risks are generated by domestic prices for certain food products, affected by supply-side factors and the environment in the related global markets.

Short-term proinflationary risks are also connected with stronger volatility in global markets, driven by various geopolitical developments, among other factors, which may have an effect on 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 under the baseline scenario are chiefly grounded in a weaker recovery in demand in Russia and globally. The economic recovery may be slowed down by the spread of new coronavirus strains and lower than expected paces of vaccination, among other things, as well as a tightening of restrictive measures. Persistent changes in consumer preferences and behaviour, including a persistent higher propensity to save, and a slower recovery of household incomes might also exert a constraining influence on inflation. 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 through inflows of foreign labour force.

Uncertainty remains as to rather long-term structural effects of the coronavirus pandemic for the Russian and global economies, specifically, the scale of a decrease in the potential of the national economy. Potential global growth may also come under marked pressure from geopolitical factors including rising trade conflicts. The extent of the Russian economy’s deviation from its potential, specifically in the consumer sector, is the core driver of medium-term inflation movements.

Medium-term inflation is significantly impacted by fiscal policy. In its baseline scenario, the Bank of Russia proceeds from the parameters of the federal budget and the budgets of constituent territories reflected in the Guidelines for Fiscal, Tax and Customs and Tariff Policy for 2021 and the 2022-2023 Planning Period, as well as from the announced time frames for the completion of anti-crisis measures of the Government and the Bank of Russia.

If the situation develops in line with the baseline forecast, the Bank of Russia will determine the timeline and pace of a return to neutral monetary policy taking into account the still high heterogeneity of current economic and price movement trends, actual and expected inflation dynamics 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 12 February 2021 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 19 March 2021. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time.

 

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 12 February 2021

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