The Bank of Russia kept the key rate at 16% per annum

The Bank of Russia kept the key rate at 16% per annum

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Following the results of the first meeting this year, the Bank of Russia kept the key rate at 16% per annum – this opens up a period for the Central Bank when maintaining the rate or even a slight decrease in it will tighten monetary policy. How long this process will continue is unknown. For now, the time frame can be defined as several months. However, as follows from the updated forecast of the Central Bank, what is happening is considered as a problem for 2024, which almost does not extend to the next.

Head of the regulator Elvira Nabiullina at a press conference statedthat uncertainty about the rate of decline in inflation remains, so tight policy needs to be maintained for a long time. This is the main thesis within which the board of directors of the Central Bank He has made a decision keep the rate at 16% per annum. The regulator justified the decision by the fact that the impact of tight monetary policy on inflation is becoming more pronounced, but the reduction in price growth is not yet sustainable. The regulator sees opportunities to reduce the rate, but the deadline for the first reduction has been moved to a later time, and the process will proceed “smoothly.” The rate forecast was also slightly increased – to 13.5–15.5%. In the materials of the Central Bank there is no explicit indication of exactly what “later time” the rate reduction was postponed; on the contrary, the head of the Central Bank clarified: the board of directors discussed not only the possibility of reducing the rate, but also the option of increasing it, and in the end the point of view of immutability won.

Maintaining the rate at the current level in practice means an additional tightening of monetary policy without a formal rate movement: inflation is now declining, although by the standards of the Board of Directors of the Bank of Russia this process cannot be considered sustainable.

On average for December-January, current seasonally adjusted price growth decreased to 6.6% annualized (compared to 11.5% in the autumn months). The same core inflation rate decreased to 7% annualized (compared to 10.2% in the autumn months). The annual inflation rate remains close to December 2023 levels due to the base effect and, according to estimates as of February 12, amounted to 7.4%.

The transfer of the weakening exchange rate into prices, on the contrary, according to the Central Bank, has already been completed: the high rate restrained the demand for imports and foreign currency, said Elvira Nabiullina.

But domestic demand continues to significantly outstrip the possibilities for expanding the production of goods and services, although the Bank of Russia does not currently provide estimates (which by definition cannot be accurate, since we are talking about unobservable indicators) of the output gap, that is, data on the scale of the continuing “overheating” in economy. The shortage of labor resources remains the main limitation for expanding the production of goods and services. Operational indicators, including surveys of enterprises, indicate, from the Central Bank’s point of view, that the rigidity of the labor market remains high, although, according to the regulator, it has stopped growing in a number of industries. Balancing supply and demand will take “a long time,” and this is an additional statement that a tight monetary policy in the coming months is practically guaranteed: a rapid rate cut and a reduction in the gap between the cost of money and inflation in 2024, at least in the first half of the year, are expected do not do it.

The Central Bank also adjusted its expectations for external terms of trade: the situation in the global economy is slightly better than expected, but this does not lead to increased demand for the non-resource sector. The removal of some of the voluntary restrictions on oil supplies by OPEC+ countries could put pressure on oil prices.

Payments and logistics also continue to become more complex: the market could move into surplus in the second quarter, which could put pressure on prices. Export estimates for 2024 have been lowered – the trade surplus will be lower than in 2023. “Secondary sanctions, worsening market conditions, risks from inflation expectations—this can create secondary effects,” the head of the Central Bank repeated once again. Note that estimates of these secondary effects are traditionally made less frequently due to their complexity and low reliability.

Separately, Elvira Nabiullina had to respond to fears of a weakening of the course after the presidential elections. They may be associated with a reassessment of the impact of the requirement to sell foreign currency earnings, introduced in October last year. Let us recall that the provisions of the presidential decree of October 11, 2023 on the mandatory sale of foreign currency apply to 43 exporters, the share of exports in whose revenue exceeds 60%. The government decree, adopted in addition to the decree, orders these companies, from October 16, to credit their accounts in Russian banks with at least 80% of the currency received under export contracts, and to sell at least 90% of the amounts credited in this way. The exchange rate is determined by fundamental factors – the regulator continues to analyze the effect, but other factors play a big role.

According to the observations of the Central Bank, there is also good news showing that its actions are effective. Activity in the unsecured consumer lending market and in the mortgage lending market segment has decreased significantly. The first signs of a slowdown, which was not the case before, are already showing in corporate lending.

The change in the Central Bank’s forecast demonstrates approximately the same overall picture as individual details: economic growth above potential will be slightly longer than expected at the end of 2023, the rate of attenuation of the credit impulse, which ensured overheating along with public sector spending, is slightly lower than expected (so, in the inflation forecast for 2024, according to average annual inflation, the lower limit is shifted from 5.8% per annum to 6%, but not the upper limit, 6.5%), the growth of the money supply will be somewhat faster due to the continued above-plan growth of corporate credit. Finally, the forecasts for gross capital formation in the economy have been greatly improved (which may serve as confirmation of the Central Bank’s expectations of an even longer period of tight monetary policy than previously expected; we repeat that for this the Bank of Russia does not need to raise the rate or even maintain it at the current level, it is enough to reduce it more slowly lower inflation expectations) and slightly improved final consumption forecasts for 2024. However, the forecast is mainly in the negative zone. Fundamentally, the Central Bank’s opinion on what is happening in the economy has not changed, as evidenced by the unchanged parameters of the basic version of the forecast for 2025–2026. The Bank of Russia considers the current problems with inflation to be local rather than systemic.

Tatiana Edovina, economics department

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