The Central Bank called the main risks for price growth next year

Following the meeting on December 16, the Bank of Russia decided to keep the rate at 7.5%. But the regulator noted an increase in pro-inflationary risks and their prevalence over disinflationary ones. “Among the pro-inflationary factors, I will single out increased inflationary expectations, a shortage of labor in certain sectors, restrictions on the supply side, an expansion of the budget deficit, as well as a deterioration in the terms of foreign trade,” said the head of the Central Bank, Elvira Nabiullina, at a press conference on Friday.

Against the backdrop of the effects of partial mobilization, labor shortages are increasing in many industries, the regulator said in a press release following a meeting of the board of directors. “Due to the increased shortage of staff, companies’ labor costs are increasing. This is noticeable in the enterprises of industry, transport, logistics and construction. If salaries grow at a rate higher than labor productivity, this may lead to an additional increase in prices through business costs,” Nabiullina explained. It is possible that the shortage of workers will continue to grow, she warned.

A slowdown in the global economy may weaken external demand for Russian exports and also have a pro-inflationary effect through the weakening of the ruble, the Central Bank believes. Further strengthening of external trade and financial restrictions, fragmentation of the global economy and the financial system can lead to a greater than expected in the baseline scenario, reducing the potential of the Russian economy, which is also a significant risk, the regulator said. Despite the relatively low growth rates of prices in previous months, inflation expectations of the population and price expectations of enterprises are at an elevated level, the Bank of Russia stated.

When making a decision on the rate, the Central Bank took into account the increase in the estimate of the federal budget deficit this year, Nabiullina said. Earlier, the Ministry of Finance raised the estimate of the budget deficit from 0.9 to 2% of GDP. In the event of further expansion of the budget deficit, a tighter monetary policy may be required to return inflation to the target in 2024 and maintain it near 4% in the future, the regulator said in a press release.

According to the Central Bank forecast, annual inflation will decrease to 5-7% in 2023, return to 4% in 2024 and stay close to 4% in the future. In November, the annual growth rate of consumer prices amounted to 12% after 12.6% in October, the regulator said. As of December 12, annual inflation accelerated to 12.7%, taking into account the indexation of utility tariffs postponed from July 2023.

The Bank of Russia will make further decisions on the key rate, taking into account the actual and expected inflation dynamics relative to the target, the process of economic restructuring, as well as assessing the risks from internal and external conditions and the reaction of financial markets to them. The next meeting of the board of directors is scheduled for February 10.

The decision of the Central Bank on the rate was justified and quite expected, said Dmitry Panov, coordinator of Business Russia in the Northwestern Federal District. As before, inflation became the basic benchmark for making a decision – despite its slowdown in recent months, the pressure of pro-inflationary factors is increasing, he agreed. At the same time, maintaining the key rate indicates the achievement of conditional stabilization of the Russian economy, which in turn provides more opportunities for business and the population for long-term planning, the expert added. Business assesses today’s decision of the Bank of Russia on the key rate as expected, agrees Elena Dybova, vice-president of the Chamber of Commerce and Industry of the Russian Federation. According to her, the development of business is now constrained not by the key rate, but by the uncertainty of the development of the situation. Businesses are wary of making serious long-term investment decisions, she said.

Increased risks

It is quite expected that pro-inflationary risks will increase next year, says the chief economist “BCS The world of investments” Natalia Lavrova. According to her, they may be associated with the weakening of the ruble, logistical problems that are growing in the face of sanctions, as well as increased government spending. At the same time, inflation is expected to be rather weak at the beginning of the year, largely due to the base effect, the expert admitted. In the second quarter, it may go below the target. By the end of the first quarter, inflation will drop to 4%, and even lower in the second quarter, Denis Popov, chief analyst at PSB, expects. The main driver of such a sharp decline will be the effect of a high statistical base in 2022, as well as moderate domestic demand and a relatively stable ruble, he agreed. Already in the second half of the year, the growth of consumer prices may accelerate, both against the background of a seasonal increase in budget expenditures and due to the factor of deferred demand, the head of the analytical department of the bank believes “Zenith» Vladimir Evstifeev. In the baseline scenario, inflation will drop to 3-3.5% in April and accelerate to 6.5% at the end of the year, Anton Tabakh, chief economist at the Expert RA rating agency, predicts.

Under moderately conservative assumptions, the trajectory of annual rates will be approximately as follows: 11–12% in January-February, 3–5% in March–May (due to the high base effect), 5–8% in the second half of the year, the director estimated groups of sovereign and regional ratings ACRA Dmitry Kulikov. In general, the inflationary background relative to the norm will continue to be elevated, the expert believes. Inflation dynamics in 2023 will be influenced by two main factors: the ongoing process of structural transformation of the economy and the delayed effects of population migration, said Sergei Grishunin, Managing Director of the NRA rating service.

Problems in the labor market

The Chamber of Commerce and Industry started talking about the shortage of labor force and the problem of staffing the business three years ago, Dybova noted. The partial mobilization carried out this year only exacerbated a long-standing problem, she said. The shortage of qualified employees today, according to her, affects absolutely all branches of business. As a result, there is a significant increase in wages, which is associated only with the fact that to retain employees, and not to ensure the growth of labor productivity, the expert explained: on average, the increase in wages for such employees is already 20-30%.

In many segments, there is a shortage caused by both mobilization or going into contract service and relocations, Tabakh said. The demographic situation and the decrease in migration from outside only add pressure to the market, he noted. Labor market pressure on inflation to ease in 2023, chief analyst believes Sovcombank Mikhail Vasiliev. Part of the workforce that left after September will be returning in the coming months, the expert expects.

Given that the economy will remain in recession in 2023, demand for labor could also fall significantly, Lavrova said. Therefore, what now seems to be a serious pro-inflationary factor will very likely be leveled next year by weak economic growth and the need to cut jobs, she admitted.

Rate in the new year

In the first meetings of next year, the Central Bank will keep the key rate at the current level of 7.5%, Vasiliev expects. If pro-inflationary risks are not realized, then the regulator may return to its reduction in the middle of the year with the goal of 6-7% at the end of the year, the expert believes. The likelihood of a rate cut next year is quite low, Evstifeev said. This is due to a high degree of uncertainty and the fact that the main pro-inflationary factor is the federal budget, he explained. In the base scenario, the key rate in 2023 will be in the range of 7–8%, Grishunin expects. The probability of lowering the rate is still minimal, and the possibility of raising it to 8% or more will increase if the budget deficit exceeds 2%, inflation – 7%, the expert believes.

Despite the strengthening of medium-term inflationary factors, the regulator is unlikely to be able to raise the key rate in 2023, Lavrova believes. The effects of a weaker ruble on inflation will be offset by the disinflationary effect of declining demand, while labor market shortfalls, which could drive up company spending, are also partly offset by subdued labor demand amid a prolonged recession, she said. With such restrictions, the regulator is likely to continue easing monetary policy, but more gently, and will take a break during periods of increasing inflationary risks, the expert expects.