Against the backdrop of lower expectations for price growth, the Central Bank rate has likely reached its peak

The population’s inflation expectations dropped noticeably in January, although company surveys indicate an increase in pro-inflationary risks, the Bank of Russia cited survey data on Wednesday. Analysts do not expect that the decrease in expectations will significantly affect the regulator’s February decision on the size of the key rate – its first reduction from the current 16% is projected no earlier than the summer of 2024.

Bank of Russia published preliminary results of the January (9–18 January) survey on population inflation expectations. For the year ahead, they decreased from December 14.2% to 12.7% in annual terms (in November it was 12.2%, see chart). Expectations of price growth turned out to be lower than in December, but higher than in November, both among respondents with and without savings. Inflation observed by the population decreased in January from 17% to 16.3% (in November – 15.1%).

“This is not a bad dynamic, especially in light of the local slowdown in inflation itself, but this is unlikely to have a significant impact on the Central Bank’s decision in February,” notes Yegor Susin from Gazprombank. According to Dmitry Polevoy from Astra Asset Management, the return of expectations to lower levels reflects both the stabilization of the ruble and the normalization relative to December of price dynamics for “irritant goods” (eggs, meat, gasoline).

However, the indicator still remains elevated, suggesting the level of the real rate (the key rate of the Central Bank minus expected inflation) around 3.3%.

“The Central Bank’s estimate of the neutral rate is 2–3%, that is, the policy in this sense does not look overly tough. Therefore, for the Central Bank to be confident that inflation will decline steadily, it will require a further reduction in the expectations of the population and business, a stable ruble and a further reduction in monthly data on seasonally adjusted inflation,” notes Dmitry Polevoy, adding that the shortage in the labor market and sanctions continue to apply in favor of accelerated price growth. Inflation close to the target level (about 4%) was in line with expectations at 8–9%, inflation expectations remain high and volatile, and monetary policy should strive not only to reduce, but also to “anchor” them, Telegram authors add -channel “Hard numbers”.

On the one hand, the December decline in inflation and its low weekly estimates in the first two weeks of January actually eliminate the risk of the regulator raising the key rate at a meeting in February; on the other hand, the Central Bank’s data on companies’ inflation expectations according to a survey dated January 1–18 are not very positive. The growth of costs and selling prices has slowed, but enterprises in their business plans are based on annual inflation of 9.5% – and this is the maximum since 2019. Price expectations are rising (retail respondents believe that selling prices will rise by 12.9% in annual terms over the next three months), labor supply has reached a local minimum (enterprises are ready to raise wages to cope with labor shortages), and occupancy production capacity (81%) reached a historical maximum. “Elevated and unanchored inflation expectations indicate the persistence of pro-inflationary risks,” the Central Bank concludes.

For now, analysts are waiting for the start of a gradual reduction in the Central Bank rate (no earlier than June), noting that the current 16% will be its peak value. According to Alexander Isakov from Bloomberg Economics, based on the expectations of the interest rate swap market, by the end of July 2024 the key rate of the Bank of Russia may be lower than the current one by 150 basis points, that is, at the level of 14.5%.

Artem Chugunov