The Bank of Russia increased the key rate to 16%

The Central Bank continued to increase the key rate, raising it on Friday by another 100 basis points, to 16% per annum. As before, this decision was dictated by high inflationary pressure – by the end of the year, the regulator expects inflation to be close to 7.5%. The desired reduction in price growth in 2024 assumes “a long period of maintaining tight monetary conditions,” the Central Bank warns. At the same time, it records a more significant deviation of economic dynamics from the “balanced growth trajectory” than expected – the Central Bank now expects that by the end of 2023, Russian GDP will increase by more than 3%.

Today, the Central Bank again raised the key rate – from 15% to 16% per annum. In issued by the regulator statement this is explained by the fact that inflationary pressure remains high – annual inflation, as of December 11, amounted to 7.1% (after 7.5% in November), but this decrease is due to the high base effect of early December last year, when an unscheduled indexation of tariffs for housing and communal services. At the end of the year, the Central Bank expects inflation to be around 7.5%. At the same time, the regulator still predicts a decrease in inflation to 4–4.5% in 2024, but this will require “a long period of maintaining tight monetary conditions in the economy.”

In general, the Bank of Russia notes an increase in sustained inflationary pressure in recent months due to the fact that demand growth continues to outpace the ability to expand the production of goods and services, but at a faster pace than previously recorded by the regulator. “One-time pro-inflationary effects on individual commodity markets also made some contribution to the current price rise in recent months,” the Central Bank adds. Let us recall that in recent months prices for chicken meat and eggs have been growing at double-digit rates against the backdrop of a decline in livestock and production (see “Kommersant” dated December 15).

Over the medium term, according to the Central Bank, pro-inflationary risks remain significant. These risks themselves are the same: the impact of geopolitical tensions on the terms of foreign trade, the strengthening of external trade and financial restrictions, which may further weaken the demand for goods from the Russian Federation, the complication of production and logistics chains, as well as financial settlements. The Central Bank also calls the maintenance of inflation expectations at elevated levels or their further growth a significant risk – then lending will expand at an accelerated pace, and the population’s propensity to save, on the contrary, will decrease. This will exacerbate the situation in which domestic demand grows faster than supply expands (especially in conditions of low unemployment).

Assessing economic activity, the Central Bank notes that its growth in the third quarter and according to operational data for the fourth quarter significantly exceeds the regulator’s October expectations – the deviation from the balanced growth trajectory in the second quarter became “more significant,” which is reflected in the current price rise. At the end of the year, the Bank of Russia expects GDP growth to exceed 3% (in the October forecast – 2.2–2.7%). According to the Central Bank, imports decreased slightly compared to the summer peak values, including due to the effect of an increase in the key rate; exports decreased more sharply due to the deterioration of the situation on world energy markets.

As the regulator notes, in the coming quarters, demand for imports in ruble terms will continue to adjust to the decisions already made on the key rate.

The signal regarding the Central Bank’s further actions remained neutral – the regulator will make decisions on the key rate taking into account inflation dynamics, economic development, as well as risk assessment and the reaction of financial markets to them. The next meeting on the key rate is scheduled for February 16.

Evgenia Kryuchkova