Nabiullina explained the conditions for raising the key rate: with a budget deficit

The head of the Central Bank told where the economy is heading and in what conditions wage growth is dangerous

Interest in this year’s first meeting of the Board of Directors of the Bank of Russia on the key rate began to warm up in advance. So, on the eve of the Bloomberg agency reported that the government allegedly requires the regulator to reduce this figure and give more optimistic forecasts. This information was quickly refuted by the Cabinet itself. Then the difference in positions began to be discussed on social networks, pointing out that President Putin calls for raising the salaries of Russians, and the Central Bank indicates that the growth of monthly incomes can stimulate inflation. And, finally, there was information that lawyers in the EU are again looking for options to select the frozen assets of the Bank of Russia in favor of Ukraine. As the chairman of the Central Bank of the Russian Federation Elvira Nabiullina commented on the most pressing economic topics – in the material “MK”.

At the meeting of the Board of Directors of the Central Bank of the Russian Federation, the option of lowering the rate was not considered at all. There were proposals to increase this indicator, but a consensus was formed about maintaining it and tightening the signal, Elvira Nabiullina said at a press conference, dispelling all the rumors that appeared in the press on the eve of the fateful decision. Experts noticed that this time the regulator gave a hint at the further trajectory of the rate, and this was not previously in his statements. The Bank of Russia saw the main threat in the acceleration of budget spending. If the budget deficit grows (and it has already reached 1.76 trillion rubles in January), the risks of rising prices will increase, which may require a tighter monetary policy. That is, it will be necessary to raise the key rate “to return inflation to the target in 2024”, and it is at the level of 4%.

At the same time, optimism in the Central Bank’s forecast was also noticeable: in 2023, the regulator does not see serious risks for the domestic economy. It can even move to growth in the middle of the year. A major role in this, in addition to the increase in export prices for Russian goods, was played by the adaptation of business and the domestic market to the sanctions. “As for the dynamics of GDP, the quarterly dynamics is already positive in the third and fourth quarters,” Nabiullina stressed. “If we talk about annual indicators, then, in our opinion, GDP will move into the positive area in the middle of this year.” At the same time, in assessing this indicator, the regulator still gives “symmetrical forecasts” for the time being – GDP by the end of 2023 will be in the range from -1% to +1%, the head of the Central Bank added.

Special attention was paid to the labor market and the issue of wages. The head of the Bank of Russia noted that unemployment is at historical lows today. However, in the face of a shortage of workers, employers may begin to raise wages by attracting employees, and this may already provoke an increase in inflation. This statement by the Central Bank, made in an analytical report published a week ago, drew the attention of users of social networks. At first glance, it conflicts with the tasks that Vladimir Putin set for the government. Recall that at the end of January, at a meeting of the Council for Strategic Development and National Projects, he instructed the Cabinet of Ministers to achieve an increase in real wages of Russians and reduce poverty.

According to Nabiullina, this contradiction is imaginary. “On the contrary, we are in favor of a steady growth in real wages,” she stressed. “But a steady growth in real wages is only possible with an increase in labor productivity, otherwise it will be eaten away by inflation.” The regulator draws attention to the fact that if labor productivity lags behind wage growth, then such income cannot be sustainable. A worker’s income can grow steadily only if it is accompanied by an increase in the output of goods, otherwise, eventually, because less goods are produced and wages rise, their prices will increase, inflation will accelerate, and eventually the worker will become poorer. The regulator fears the development of such a scenario.

The Bank of Russia sees three risks that in the future may lead to inflation deviating from the baseline forecast. These included: a shortage of workers, a lag in labor productivity growth from an increase in wages, and a rapid unwinding of consumption, coupled with a tightening of sanctions pressure.

Recall that the regulator sees its main task as controlling inflation, the target for this indicator has been at the level of 4% for many years. By the way, today the Central Bank reported that in the coming months, annual inflation in Russia will drop below 4% due to the “high base effect of 2022” (a sharp increase in prices last year, next to which their current growth will not be so noticeable). But by the end of this year, the Central Bank expects inflation to be 5-7%, after which in 2024 it will return to the already stable target of 4%.

During the press conference, journalists tried to raise the currency issue and even asked for advice on what currency is more profitable to keep savings. “We are doing everything to make it profitable to keep in rubles, so that ruble savings do not depreciate,” Elvira Nabiullina emphasized.

In connection with the increasing frequency in the last month of reports of attempts by the governments of unfriendly countries to take away the frozen assets of Russia in order to then send them to help Ukraine, the question arose of how the defense of the interests of our country is moving in the international arena. Nabiullina announced the preparation of claims on the frozen reserves of Russia. “We are preparing them (lawsuits – N.T.) – this work does not stop,” she said. However, she added that the process is “legally complex”, so it will obviously take a long time to wait for the results.

Read also: “The Central Bank left the key rate unchanged: experts explained the reason”