Nabiullina explained the decision of the Central Bank: the rate worked, but inflation remained

The regulator found himself in zugzwang: any move threatens to worsen the situation

Last year’s tightening of monetary policy by the Central Bank yielded results: the growth rate of consumer prices in Russia began to slow down. This is the key thesis from Elvira Nabiullina. The tone of her report at the press conference on February 16 was restrainedly positive, and the head of the Central Bank herself looked a little tired. In addition, there was a feeling of some lack of agreement, a feeling that reality did not quite correspond to what was said.

The February meeting of the Board of Directors of the Central Bank and Nabiullina’s briefing on its results are the first in the new year 2024. The pause lasted exactly a month: the last time the regulator made a decision on the rate was on December 15, raising it from 15% to 16%. And although this time the Central Bank did not take drastic steps, keeping the rate at the same level, the current event is clearly not an ordinary one. It can be called a milestone, since it sets the vector of movement of monetary policy in conditions that have undergone certain changes compared to last year. The only question is in which direction – good or bad. Nabiullina made it clear: no doubt, it will be a good one.

“Tough monetary conditions have formed. Under their influence, savings activity is intensifying, and lending activity is gradually cooling, noted the Chairman of the Central Bank. “The peak values ​​of the current price increase have passed in the fall; the weakening of inflation trends is primarily due to the tightening of monetary policy.”

According to Nabiullina, the economy is now returning to a more balanced growth trajectory, but since it still remains overheated, the process is slow. Overall demand, fueled by government spending and accelerated lending, grew significantly stronger in 2023. Accordingly, all that remains is to wait. “The reduction in the key rate will occur smoothly, disproportionate to its recent increase.” And it could start in the second half of 2024.

In general, the report contained the same theses that were made public the day before in a press release following the Central Bank meeting. Which, in its tone and content, seems somewhat more focused on current problems and potential risks.

And they are as follows: inflationary pressure remains high; domestic demand continues to significantly outstrip the possibilities for expanding the production of goods and services; the annual inflation rate still remains close to the levels of December 2023 due to the base effect and, according to estimates as of February 12, amounted to 7.4%; the shortage of labor resources remains the main limitation for expanding the production of goods and services; Issues of mortgage loans within the framework of government preferential programs remain high; disinflationary risks are primarily associated with a faster slowdown in domestic demand growth than expected in the baseline scenario.

One thing is obvious: the Central Bank compromised, refusing to raise the rate even by half a percent, although this option was considered. There are some reasons to believe that the regulator’s management is in a very difficult position. It resembles zugzwang (translated from German as forcing to move), when any subsequent move leads to a deterioration in the position on the chessboard. Although checkmate may be a long way off, the future development of the game does not bode well.

Experts agree: the key rate has virtually no effect on the basic, fundamental factors that shape inflation. In particular, to the unsatisfactory balance of exports and imports, to the deficit of the federal budget and labor force, to the rising cost of logistics in trade with Asia. In short, everything that leads to a weakening of the ruble.

Meanwhile, apparently, the period of ruble strengthening has ended. Today the rate tested the level of 93 rubles per dollar, and the euro again came close to the “hundred”. Macroeconomic indicators do not inspire optimism either. For example, in January-November last year, exports fell by almost a third (-28.3%), and the cost of imports increased by 13.6%. The budget deficit amounted to 3.2 trillion rubles, although in January it was 308 billion.

But the Central Bank, in fact, has only one answer to all these challenges: the key rate is its only available working tool. With its help, it was possible to cool consumer demand, but did not adjust prices. Inflation can be reliably extinguished only in the event of a sharp, almost to zero, drop in demand. The situation, thank God, has not yet reached this point.

Read also: The Central Bank did not change the rate: the key indicator was left at 16%