The Bank of Russia kept its key rate at 7.5% per annum

The Central Bank today for the sixth time in a row kept the key rate at 7.5% per annum – while the signal for further decisions has been tightened: the Central Bank “allows the possibility” of raising the rate at the next meetings. This is due to increased inflationary pressure and an even greater shift in the balance of risks towards pro-inflationary ones. At the same time, economic activity is growing faster than the Central Bank expected in April, which reflects a strong recovery in domestic demand, a significant contribution to which is provided by state investment.

The Bank of Russia, as analysts expected, today at a meeting of the Board of Directors decided to keep the key rate at 7.5% per annum – the figure has not changed since September 2022. As noted in regulator’s message, annual inflation began to rise – according to estimates on June 5, it accelerated to 2.6% after 2.3% in April. In terms of the year, the current rate of price growth is estimated at about 4%.

This acceleration is due to the recovery of consumer demand and the gradual transfer to prices of the weakening of the ruble that has occurred since the beginning of 2023, while, as the Central Bank notes, “the growth of inflationary pressure is manifesting itself in an ever wider range of goods and services.” At the end of the year, the indicator is projected at the level of 4.5-6.5% – to the target 4%, the Bank of Russia expects that inflation will return in 2024.

The balance of risks in the medium term is shifting even more towards pro-inflationary ones – they are associated, in particular, with a significant shortage of labor in a number of industries, which may lead to labor productivity growth lagging behind the growth of real wages, as well as accelerated budget spending and the influence of external conditions, for example, increased sanctions could dampen demand for Russian exports, which would have a pro-inflationary effect through the exchange rate.

In this regard, the Central Bank considers “high and unanchored inflation expectations”, which are especially sensitive to exchange rate fluctuations, to be an additional pro-inflationary risk in this regard. Under these conditions, the pass-through of the ruble weakening that has already occurred since the beginning of the year may turn out to be more pronounced than expected in the baseline scenario.

Price expectations, both of the population and enterprises, remain at an elevated level, although they are rather heterogeneous.

So, if in agriculture there has been a significant decline in recent months due to seasonality, then in trade and manufacturing, on the contrary, they have grown.

At the same time, the Central Bank notes a faster growth in economic activity than assumed April forecast, due to the active recovery of domestic demand, which is actively supported by the growth of state investments and makes an increasingly significant contribution to the dynamics of aggregate demand, partially replacing the external one, and also supports the mood of enterprises. At the same time, there is an active growth in lending, both corporate and consumer.

The signal regarding further actions of the Central Bank in relation to the key rate has tightened – if before that the regulator announced that it would assess the feasibility of raising the key rate, now it “allows the possibility of raising the key rate at the next meetings” in the face of a gradual increase in the current inflationary pressure “to stabilize inflation close to 4% in 2024 and beyond.” The next meeting is scheduled for July 21st.

Evgenia Kryuchkova