The Central Bank proposes to stick to the values ​​of low inflation in any scenario

The draft “Guidelines for the Unified Monetary Policy for 2024 and for the Periods of 2025 and 2026”, published by the Bank of Russia, assumes the steady continuation of the implementation of the current Central Bank strategy, which proved effective in 2014-2022. In the basic version of the Central Bank’s forecast, the regulator assumes that this will give a target inflation of 4% per annum in 2024, stable GDP growth of about 1.5% per annum and moderate interest rates on loans in 2025. In two more risky scenarios, which will be determined by events outside the Russian Federation, a one- or two-year decline in GDP by the end of 2024 will be from 2% to 6%, inflation will normalize by the end of 2026 or earlier. Problems with the exchange rate, apparently, exist in all scenarios – now the contribution to the devaluation, according to the Central Bank, is made, among other things, by the state of domestic demand, which is very good under the current circumstances, and it is expected that the recession will also make it.

The Draft ONDKP, the “budget” three-year forecast of the Bank of Russia, is a detailed and commented in detail version of the Central Bank’s scenarios for the development of the situation, as well as a de facto declaration of how the regulator intends to act within these scenarios. The draft version of the report was presented on Friday, including at a press conference by Deputy Chairman of the Central Bank Alexei Zabotkin, and it is somewhat broader than the annual document of the ONDKP. It integrates the results of the final review of the Central Bank of monetary policy (the standard for such a review is once every five years), which clarified a number of important priorities of the Bank of Russia for the medium term. The main priority of the monetary policy – the inflation target of 4% – has been de facto confirmed: the question of revising the inflation target to 3% (this, for example, is the target of the National Bank of China with reservations) can be raised, but after a number of conditions for inflation stability in the Russian Federation are reached , that is, not now, the inflation target format – period – is confirmed as the most rational.

The question of which of the scenarios of the previous 2022 PrEP report materialized in the reality of 2022-2023 is complex. On the one hand, the basic version of the forecast of the Bank of Russia, which assumed a moderate continuation of the decline in GDP with rapid stabilization of inflation in 2023, did not materialize.

The reality is closer to the “Accelerated Adaptation” scenario, with the exception that in practice the Russian economy, apparently, including overstimulated by the budget stimulus, resulted in GDP dynamics not of the order of 1%, but (the basic version of the forecast for 2023 of this year ) 1.5–2.5%.

Actually, in the current macro-situation, this is the main difficulty of the Central Bank. On the one hand, accelerated adaptation can be called super-accelerated – it was impossible to count on it, and stimulating domestic demand and import demand, in fact, is the cause of not only growing inflation, which requires the Bank of Russia to raise the key rate (based on the current situation, for In order for the Central Bank not to raise the key rate again in September 2023, something unforeseen must happen). On the other hand, the current adaptation looks like a non-problematic process in details – it is a frontal increase in the utilization of existing capacities and an investment surge in infrastructure and construction, but not in end-use areas, which one might expect. A separate question is about the competitiveness of new Russian “import-substituting” industries in the future in competition with Chinese and East Asian imports, that is, the question of the quality of the primary rapid adaptation of the Russian economy to the sanctions imposed by the G7 after the start of the Russian military operation in Ukraine.

It should be noted that, according to the Bank of Russia, the “super-accelerated” adaptation, which can also be called local “overheating”, contributes to the devaluation of the ruble against the US dollar, which has come close to 100 rubles/$. Strong credit growth also ensures demand for imports, while exports are limited by sanctions – credit rubles issued by banks go, among other things, to pay for imports, and this weakens the exchange rate along with other factors.

In the first half of 2024, the Bank of Russia intends to publish, among other things, forecasts on the dynamics of the ruble exchange rate. However, it is for the ruble that two alternatives to the basic version of the Central Bank’s forecast do not promise any favorable prospects.

The first option involves further expansion of sanctions (including, apparently, not only against the Russian Federation) and the process of fragmentation of the world economy – deglobalization, the strengthening of regional trade blocs, a process “in which countries increasingly focus on issues of rivalry and restricting the access of competitors to its economy and technology”.

If this process goes quickly and does not lead to a recession in the countries of the “first world”, the Central Bank assumes low GDP growth in the US and the EU in 2024-2025 (about 1%) and in China (less than 5% from 2024), a moderate drop in prices for oil ($50 per barrel of Urals from 2024 and then $45). For the Russian economy, the “Increasing Fragmentation” scenario — judging by the foreign policy statements of the Russian Foreign Ministry, this is practically what the Russian Federation is seeking in its actions — means a decline in GDP in 2024 to a maximum of 2% with near-zero growth in 2025 and recovery in 2026 , a slight decline in domestic consumption (up to 2-2.5%) in 2024-2025, a tangible decline in exports and imports (but with a low, albeit positive, current account balance, which apparently guarantees the ruble is slightly weaker than now) and stabilizing M2 growth in single digits by 2025.

If the process goes very quickly and is accompanied by a recession in the world economies (“risk” scenario, a decline in US GDP by 1.5-1.9% in 2024-2025, the EU – by 0.8-1.1%, China – a decrease in growth rates below 4%), then the situation for the Russian Federation will be significantly worse, although not catastrophic. The current account will temporarily reset to zero in 2025 and remain low, although the Russian Federation will still maintain a trade surplus (for the ruble, this will probably mean an even greater devaluation), but the decline in GDP will be comparable to the “covid” in 2020.: 3– 5% in 2024 and 2–3% in 2025, with a similar decline in household consumption, a collapse in imports (about 20% in 2024), a two-year decline in exports (oil prices, Urals, in this scenario, smoothly fall from $55 per barrel in 2023 to $30 in 2025 and $40 in 2026) and a credit shock as early as 2024.

Note, however, that in two problematic scenarios (Aleksey Zabotkin once again reminded that the probability of implementing all alternative scenarios in the Central Bank’s calculations is always much lower than the probability of implementing the base one), the Central Bank expects that its inflation target is achievable, and it is ready pursue her.

In the “fragmentation” scenario, the peak of inflation is 2024, which is 5–7% per year and 4% in 2025. In a frightening “risk” scenario, the peak of inflation is also 2024, and this is 11–13% at the end of the year, but then 4% in 2025.

Key rates in the “risk” scenario – up to 13.5% of the average annual value in the “risk” scenario and 12% in the “fragmentation” scenario: in the basic version, we recall, these are approximately the same key rate parameters as now.

In other words, the main idea of ​​the Bank of Russia in the system of forecasts is that the current monetary policy model should be steadily implemented further, since it allowed the Russian economy to survive the crises of 2015, 2020 and 2022 without an economic catastrophe in any sense. In conceivable scenarios (including very tough, but realistic risky ones), the Bank of Russia believes that the results will be quite acceptable and also non-catastrophic. The implementation of the baseline scenario is the best that the Russian economy can expect in the coming years: the dollar at 100 rubles. and inflation, even at 10% per annum, is certainly not a collapse, a collapse, or a catastrophe. In principle, the Bank of Russia does not consider other options for monetary policy — in the materials of the monetary policy review in the summer of 2023, there were special works demonstrating that alternative monetary policy ideas are less viable or completely invalid.

Dmitry Butrin