The Bank of Russia increased the key rate to 13% per annum

The Central Bank raised the key rate by another 100 basis points, to 13% per annum. The decision was made against the backdrop of high inflationary pressure, caused, among other things, by the transfer of the ruble exchange rate to prices. Now the Central Bank expects consumer prices to increase by 6–7% by the end of the year. After economic growth against the backdrop of high domestic demand, the regulator expects it to slow down in the future due to limited supply. In 2023, the Central Bank still expects GDP growth of 1.5–2.5%, in 2024 – 0.5–1.5% (instead of 0.5–2.5% previously). The Bank of Russia gave a fairly strong signal regarding further actions on the key rate.

The Board of Directors of the Central Bank at a meeting on Friday, as analysts expected, made a decision again increase rate – this time in steps of 100 basis points, from 12% to 13% per annum. Let us remind youearlier the rate was increased at an extraordinary meeting on August 15 by 350 basis points.

The regulator explained the further tightening of monetary policy by the fact that inflation pressure remains high, including due to the weakening of the ruble being transferred to prices.

The Central Bank associates the depreciation of the national currency with increased demand for imports with an increase in domestic consumption, outpacing the possibility of expanding production output. By September 11, annual inflation had accelerated to 5.5% (after 5.2% in August and 4.3% in July). At the same time, the Central Bank notes, the growth of inflationary pressure is manifested “for an increasingly wider range of goods and services.”

A significant risk, according to the regulator, is the persistence of elevated inflation expectations or their further growth. In such a situation, lending will continue to expand (currently activity remains high due to banks issuing loans on previously approved conditions), and the population’s propensity to save, on the contrary, will decrease.

As a result, the situation of demand outstripping production capacity will continue and increase inflationary pressure. Against this background, the Bank of Russia revised its forecast for inflation: if earlier it expected that by the end of the year the figure would be 5–6.5%, now we are talking about the range of 6–7%. A return to the 4% target is still expected in 2024.

In terms of economic activity, the Central Bank notes growth in a wide range of industries, however, due to high domestic demand, the “upward deviation from the balanced growth path” is increasing, which helps to maintain increased demand for imports.

However, with the end of the recovery phase, economic growth will further slow down due to restrictions on the supply side, in particular, due to the shortage of available labor resources with unemployment reaching a historical minimum (3% in July) and low geographic and inter-sectoral labor mobility. The Central Bank maintained its estimates of GDP dynamics for this year, expecting growth of 1.5–2.5%, but lowered the forecast for possible growth in 2024 to 0.5–1.5% versus 0.5–2.5%. For 2025 and 2026, the forecast remained the same: 1–2% and 1.5–2.5%, respectively.

As the Central Bank notes, the return of inflation to 4% in 2024 assumes “a long period of maintaining tight monetary conditions” – in this regard, the regulator gave a tough signal regarding subsequent actions.

Thus, the Bank of Russia will evaluate the feasibility of further increasing the key rate at the next meetings – the next one is scheduled for October 27. According to the Central Bank’s forecast, the average rate by the end of the year will be in the range of 13–13.6%.

Evgenia Kryuchkova