Russia’s Central Bank has opted to keep its key interest rate at 7.50% per annum amid moderate inflation and growing economic activity. Despite this, the bank has not ruled out a potential rate hike in the near future to stabilize inflation at 4% in 2024 and beyond.
Inflation dynamics and economic growth
In March, annual inflation significantly declined to 3.5%, influenced by the high base effect. Russia’s current price growth rate has increased since the end of 2022, but remains moderate at around 4% year-on-year.
Inflationary expectations of the population have decreased, while the price expectations of enterprises have increased, displaying a multi-directional dynamic.
A number of factors have held back the current rate of price growth, including the ongoing adaptation of the Russian economy to external trade and financial restrictions, high inventory levels for some commodity groups, and moderate consumer demand dynamics.
The weakening of the ruble since the end of 2022 has had little impact on price dynamics.
In the coming months, the Bank of Russia forecasts that annual inflation will temporarily remain below 4% before gradually increasing in the second half of 2023. The central bank predicts annual inflation will be between 4.5% and 6.5% in 2023, returning to 4% in 2024.
Monetary conditions and economic activity in Russia
Monetary conditions in Russia have remained broadly neutral since the last meeting of the Board of Directors. Short-term OFZ yields have slightly decreased, while medium and long-term yields have remained relatively unchanged. Credit and deposit rates have stayed close to early 2023 levels.
Lending activity has remained strong, particularly in mortgage and corporate segments, with unsecured consumer lending experiencing accelerated growth.
Meanwhile, households continue to deposit funds into current accounts and bank deposits. The revival of consumer lending and improvement in consumer sentiment indicate a gradual decline in the population’s propensity to save from higher levels.
Economic activity in Russia has grown faster than expected, reflecting increased domestic demand and ongoing adaptation processes in the economy.
However, production expansion has been limited by labor market conditions, with unemployment reaching historical lows and labor shortages growing in many industries.
The balance of risks has not significantly changed over the medium term, with a bias towards pro-inflationary risks. Major pro-inflationary risks include geopolitical tensions affecting foreign trade terms, budget deficit expansion, labor market challenges, and high, unanchored inflation expectations.
The Bank of Russia will consider the feasibility of raising the key rate in future meetings, taking into account actual and expected inflation dynamics, economic restructuring, internal and external conditions, and financial market reactions.
The next meeting of the Board of Directors, which will discuss the key interest rate level, is scheduled for June 9, 2023.
