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

The Bank of Russia on Friday kept the key rate at 16% per annum, thus interrupting the cycle of rate increases that had lasted since July. The decision was made against the backdrop of decreasing inflationary pressure. However, it is premature to judge the sustainability of this trend – it is assumed that the current policy of the Central Bank will consolidate the process of “disinflation”. In general, to reduce inflation this year to the target 4%, the Central Bank warns, a long period of tight monetary policy will be required.

The Central Bank at a meeting of the board of directors, as analysts expected, He has made a decision on maintaining the key rate at 16% per annum. After a cycle of increases that lasted from July 2023, this marked the first pause in rate changes. The Central Bank explains its decision by the observed decrease in inflation – on average for December-January, the seasonally adjusted price growth rate decreased to 6.6% in annual terms (versus 11.5% in the autumn months), and the core inflation rate – to 7% (vs. 10.2%).

As of February 12, annual inflation was estimated at 7.4%. As the Central Bank notes, this trend largely reflects the “gradually increasing effects” of tightening monetary policy.

However, it is too early to judge the sustainability of the existing disinflationary trends. Inflation expectations of the population have decreased since the beginning of the year, as have the price expectations of enterprises, but still remain at an elevated level; this, the regulator writes, “determines the inertia of the current increased price growth.” At the same time, the balance of risks in the medium term remains biased in favor of pro-inflationary ones.

Reducing inflation to the target 4%, the Central Bank warns, assumes a long period of maintaining strict monetary conditions – due to this, annual inflation will slow down to 4–4.5% this year and will remain close to this indicator in the future. This time the Bank of Russia did not give any other signals regarding further decisions on the key rate.

At the same time, the regulator revised the forecast for the average key rate for this year, increasing it from 12.5–14.5% to 13.5–15.5%. In 2025, the figure is expected to be 8–10% (versus 7–9% previously).

Analyzing the economic situation as a whole, the Central Bank recalls that GDP growth in 2023 was 3.6%, which is higher than the regulator’s forecast; against the backdrop of increased inflationary pressure, this, according to the Bank of Russia, means that domestic demand continues to far outstrip the possibilities for expanding production. The restrictions for this remain the same, in particular, the shortage of labor resources (remember, unemployment remains low, in December – 3%).

At the same time, conditions began to form for the economy to return to balanced growth—the Central Bank regards the current indicators as an upward deviation from this trajectory. Stabilization is facilitated by the population’s growing propensity to save and, accordingly, a slowdown in the growth of consumer activity (in particular, there is a significant decrease in activity in the consumer lending and mortgage markets), as well as a cooling in demand for imports. However, the process of returning to balanced growth, the Bank of Russia warns, “will take a long time.” This year, the regulator expects economic growth to be 1–2% (the forecast has been raised from 0.5–1.5%).

Evgenia Kryuchkova