Nabiullina revealed how inflation could drop by almost half by the end of the year

The speech of the head of the Central Bank, Elvira Nabiullina, at a press conference on Friday, March 22, made an ambivalent impression. On the one hand, the conclusion arises that we are doing quite well with inflation, and with investment and consumer activity – generally brilliant. At the same time, notes of uncertainty sometimes slipped through the report of the head of the Central Bank and her subsequent answers to questions from journalists. Plus, the content of the March bulletin of the Center for Macroeconomic Analysis and Short-Term Forecasting (CMACF) contrasts with Nabiullina’s main theses.

Elvira Nabiullina’s press conference traditionally took place an hour and a half after the meeting of the board of directors of the Central Bank, which made the next decision on the key rate. Today, as is known, it was left unchanged – at the level of 16%. The main thing that interested the event participants was the motives for such a decision.

According to the Central Bank, since the beginning of the year, the sustainable rate of current price growth is in the range of 6–7% in annual terms. Core inflation rose in February after two months of decline, but slowed again in the first weeks. However, Nabiullina noted, “these data are calculated based on a truncated sample: they do not contain those goods and services that made a significant contribution to inflation in the winter months. Therefore, it is too early to judge the rate of decline in price growth in March.”

After a slight slowdown at the end of 2023, growth in economic activity accelerated again, primarily in the household consumption segment. “Consumer sentiment is near historical highs, citizens’ interest in large purchases has been growing since December,” said the head of the Central Bank. The situation, according to Nabiullina, is unusual, since this does not happen in conditions of a high key rate. Investment activity has also reached a record level: “the economy is in the investment phase of growth,” since it fully utilizes both production capacity and labor resources.

A serious limitation for further production growth remains the shortage of personnel. Unemployment fell to 2.7% in January, which indicates increasing tension in the labor market and, in part, a persistent gap between supply and demand. This situation contributes to a shift of risks towards pro-inflationary ones.

A few more important points from Nabiullina: the peak of annual inflation is expected in the second quarter of 2024; The Bank of Russia still considers it possible to start lowering the rate as soon as possible. in the second half of the year; The Central Bank does not expect the situation on the domestic fuel market to affect inflation estimates; The regulator is ready for a potential increase in sanctions against the financial infrastructure of the Russian Federation and is discussing with the exchange possible response measures to this case.

Elvira Nabiullina’s answer to a question from MK, which sounded like this, seemed ambiguous: “The Bank of Russia left unchanged the inflation forecast for the rest of the year at 4-4.5%. At the same time, for the week from March 11 to 18, Rosstat recorded a very slight slowdown – from 7.73% to 7.71%. Based on what factors does the Bank of Russia continue to maintain this forecast, given that from July 1, housing and communal services tariffs are increasing? In addition, the Russian economy is subject to “black swans”, such as the failure of up to a third of oil refineries, and who knows what other surprises?”

“Annual inflation is still a lagging indicator; it reflects inflation over the previous 12 months,” explained the head of the Central Bank. – And when making a decision on the rate, we pay more attention to current inflation pressure, including using stable indicators, cleared of seasonality. We believe that our monetary policy should ensure that inflation by the end of the year is close to the target of 4-4.5%. Yes, inflation is falling now, but we will need to assess how sustainable it is. And depending on this, if necessary, we will adjust monetary policy.”

Yes, housing and communal services tariffs may rise in the summer, Nabiullina agreed, “we take this into account in our forecast.” But in general, monetary policy works towards disinflation. As for “black swans”, they can always happen, and the Central Bank will make decisions depending on the significance of such unexpected events.

A much bleaker picture is presented in the March issue of the monthly note “Analysis of Macroeconomic Trends” prepared by the Center for Macroeconomic Analysis and Short-Term Forecasting. Its experts see signs of a noticeable deterioration in the dynamics of many economic indicators at the end of 2023 – beginning of 2024. In other words, we are talking about the harbingers of a recession.

“Data on the development of individual sectors inspires a fair amount of tension,” the authors state, “the growth of population consumption and, apparently, investment has stopped, and the export of goods is falling… The absence of any “positive” in industrial dynamics in recent months is obvious, but growth capex has stopped…”

Analysts point to the impending stop of the “construction boom”, to the fact that the decline in investment in machinery and equipment is intensifying, and “it seems that there is a shortage of imports of a number of types of components, raw materials, spare parts, and specific consumables.” According to TsMAKP, this is due to the exhaustion of previous “growth ideas” (infrastructure, import substitution, defense industry, housing construction), partly due to the tightening of lending conditions in general and mortgage lending in particular, and partly due to the emerging decline in profitability in a number of industries.

It is noteworthy that for TsMAKP, in which one of the leading positions is occupied by Dmitry Belousov, brother of First Deputy Prime Minister Andrei Belousov, such “alarmist” conclusions are by no means typical.

In general, scenarios for the development of the economic and financial situation in the country from different analytical centers are by no means consensus-based. Perhaps this is also one of the reasons why the Bank of Russia continues to maintain its key rate at a very high level – 16%.