Not so much expensive, but long

In its latest bulletin, “What Trends Are Talking About,” the Bank of Russia demonstrates the normal operation of the monetary policy transmission mechanism (MPM). The autumn increase in the key rate is working, so the likelihood of an additional increase is apparently decreasing, but the likelihood of it remaining at a high level for a longer period is growing.

“Previously adopted decisions on monetary policy have yet to fully manifest themselves in the dynamics of demand and inflation” – this quote from the Bank of Russia bulletin “What Trends Are Saying” dated November 2023 can be considered a summary of the Central Bank’s analytics on the regulator’s main short-term problem. The inability to predict with sufficient accuracy in the post-2022 environment the specific timing and nature of the implementation of monetary policy decisions worried markets throughout 2023. Analysts of the Bank of Russia are now more or less confident: nothing unusual is happening, a series of increases in the key rate to 15% from August 2023 gives exactly the results that the board of directors of the Central Bank was guided by, no additional factors that would unpredictably change the nature of the operation of the transmission mechanism PrEP, no. This increased confidence of the Central Bank should apparently reduce the likelihood of a further increase in the key rate at the end of 2023 – beginning of 2024, although it itself remains. But the main remark of the Central Bank economists is now the possibility of maintaining the key rate around current indicators for a longer period, but not the possibility of its further increase.

The general picture of the situation in the economy, recorded by the Central Bank, is already somewhat different from the October one: there is a long-awaited cooling in lending, and so far a very weak but recorded transition of households to saving behavior, and a number of other evidence that “thanks to the monetary policy transmission mechanism, the Russian economy continues return to a path of sustainable growth and 4 percent inflation, curbing overheated demand.” The Bank of Russia, in particular, notes an increase in the volume of time deposits with a reduction in the volume of funds in the banking system on current accounts and demand accounts: the transfer of household money into less liquid instruments reduces the “potential for the flow of funds from bank deposits to the consumer market.”

Population expectations for 2024 remain extremely strong. It is assumed that the income boom in sectors related to the military-industrial complex and defense, in connection with the military operation of the Russian Federation in Ukraine, will spread along the chain to other sectors of the economy, as well as to corporate income “through chains of inter-industry relationships.” The same is true for the optimism of enterprises. The cooling in output in the main industries is still visible rather in trends; the “warming up” continues. Thus, “the level of output of basic industries in October was higher than the average for the third quarter by about 0.2%, adjusted for seasonal factors,” Bank of Russia analysts write. In November, apparently, there was no longer a trend growth.

In many ways, the Central Bank’s optimism about the future cooling of the current overheating is associated with the expected cooling of the mortgage market: the revision of the terms of preferential programs here in October-November 2023 finally began to contribute to the general slowdown in credit in the economy as a whole. There are other observations that demonstrate that the Central Bank’s “transmission” works within the expected parameters, and the markets are already aware of this. Thus, the Bank of Russia has noted a decrease in yields on the OFZ market since mid-October against the backdrop of an increase in the key rate – there are many explanations for this, but they do not cancel the markets’ confidence that the situation with the “heating up” is calming down.

Dmitry Butrin