The Central Bank raised the key rate to 15% per annum and revised the macro forecast until 2026

The Bank of Russia raised the key rate to 15% per annum and revised the macro forecast until 2026. It is possible that this is the last rate increase for the coming months; in this case, the Central Bank reacted more to the growth of current and future expenses than to market factors – and in general, the Bank of Russia’s forecast, except for inflation, for 2023-2024 has been improved. However, much will continue to depend not on the decisions of the Central Bank, but on the decisions of its “aligned partners” regarding the extended government.

The decision of the Board of Directors of the Bank of Russia on the key rate on October 27 was apparently taken quite difficult. According to the head of the Central Bank, Elvira Nabiullina, three options for raising the rate were practically discussed – by 1 percentage point (most analysts bet on this option), by 1.5 and by 2 points. The majority chose the strongest option – increasing the rate by 2 points, to 15% per annum. At the same time, the Central Bank’s signal in the press release following the council’s results was reduced to neutral – nothing was said about whether the regulator would allow an increase in the rate at the next meetings (the next one is December 15, 2023). As before, the main condition for lowering the rate is a steady reduction in inflation towards a trajectory leading the Central Bank to the target of a 4% increase in the consumer price index in a year-on-year measure. At least until the end of the year, this is not feasible in scenarios imaginable in practice. But a neutral signal formally indicates that if circumstances remain unchanged, there will be no need to increase the rate at least in December – that is, perhaps the rate is already at a local peak.

This is not the first time that the Central Bank has adjusted the macro forecast for 2023–2026. From the point of view of the rate itself, the possibility of its not increasing until the end of 2023 and beyond is included in the new version of the forecast – it is predicted in November-December at an average level of 15–15.2%.

The inflation forecast for 2023 has been increased from the previous range of 6–7% “December to December” to 7–7.5%; in 2024, the Central Bank allows the target to be exceeded – 4–4.5% in the same measurement; estimate of average annual inflation for 2024 year is also increased.

The next revision of the macro forecast, which formally should be adjusted quarterly, has several components. The Bank of Russia does not hide that one of the reasons is the increase in budget expenditures for 2023–2024, “budget stimulus”: government financing increases domestic demand (already growing faster than the Central Bank expected), the gap between demand and supply is increasing. The level of the neutral rate has been revised – and this is quite unexpected, from 5.5–6.5% to 6–7%: according to Kommersant, this is a consequence of taking into account the new figures of the three-year budget in the Central Bank model. Actually, this is one of the significant factors in the current increase in the key rate, and Elvira Nabiullina confirmed this in her speech on October 27 – in the logic of the Bank of Russia, an unplanned increase in government spending while income remains unchanged requires a tighter monetary policy, that is, in the current circumstances – a higher key rates. If the White House decides on additional budget stimulus, the rate will be kept even higher and somewhat longer.

However, such changes are already unlikely, and the limits of the Central Bank’s rate increase are in fact quite limited: now for 2023, the regulator expects credit growth rates in the economy in the range of 5–10% for 2024 (the previous forecast was 7–12% with further slight growth rates), with a further increase in the rate at a GDP growth rate forecast for 2023 of 2.2–2.7% year on year, the stop in credit growth will apparently be too sharp.

Perhaps, in the series of decisions of the Central Bank on the key rate in recent months, the October decision is more important than others – the rate was increased noticeably (and above expectations), while the Central Bank’s forecast, if you do not pay attention to inflation figures, has been significantly improved, at least for those , who considers precisely such columns in the tables of macro forecast and balance of payments forecast in the base scenario of the Bank of Russia to be an improvement. The Central Bank expects a very large jump in savings at the end of the year: previously, its year-on-year growth was expected for 2023 in the range of 3.5–6.5%, now – 11.2–12.7% (with a corresponding “rebound” in the effect bases in 2024). The forecast for a decline in exports in 2023 has slightly worsened, but for 2024–2026 the Central Bank sees the situation better than in September – thus, forecast oil prices (now Brent, not Urals in Bank of Russia forecasts) have been improved, as have, accordingly, forecasts according to the balance of payments 2023–2026, and this should mean good chances for the ruble to strengthen or, at least, exchange rate stability.

In general, the Bank of Russia, based on macro forecast figures, expects a fairly quick elimination of “overheating”, a return of inflation to the “target” without major shocks and without visible strong imbalances.

Let us note, however, that the situation in which the Central Bank is forced to increase the rate largely due to the fact that the government is increasingly actively spending federal budget funds, in many cases compensating companies for losses from previous rate increases, including under preferential programs, will once again Once again confirms that the capabilities of the Central Bank’s monetary policy are limited, and it itself does not operate in the ideal space of a mechanically managed financial system, but in an economy where other regulators operate with varying degrees of coordination, primarily the Ministry of Finance as the manager of the budget system. From the point of view of the “end” players, the bet is not perceived in isolation. Thus, a significant part of the questions asked to the head of the Central Bank concerned the Bank of Russia’s assessments of the impact on macro parameters of new “stepped” export duties and partial foreign exchange controls – the Central Bank does not advertise, but, it seems, does not hide its skeptical attitude towards the effectiveness of these measures, which at the same time were adopted with the consent of the Bank of Russia, but are far from its authority.

At the same time, the Central Bank and government departments have very different operational goals: the Bank of Russia is fighting inflation, the Ministry of Finance needs budget balance, the Ministry of Economy, the Ministry of Industry and line ministries, simply put, must maximize employment, output and GDP, state-owned companies – profit, private companies – return on investment .

An example of how the areas of regulation are “mixed” in the discussion is the discussion in the Russian Union of Industrialists and Entrepreneurs of the Central Bank’s monetary policy – according to Interfax, the bureau of the union’s board proposed in early October that the government, the State Duma and the Central Bank, “taking into account the experience of China,” subsidize interest rates through the Bank of Russia investments of companies in fixed capital, “harmonize” the key rate with the rates in the BRICS countries and introduce an open currency position standard for non-bank legal entities to stabilize the exchange rate. At the same time, there are obvious disagreements within the RUIE itself on these same measures. Thus, Surgutneftegaz is against the standards for the currency position, and Severstal considers the idea of ​​“harmonizing the rate with the BRICS” controversial. In essence, the current monetary policy of the Central Bank was more or less fully supported only by the co-owner of Interros, Vladimir Potanin, who was quoted by Interfax: “First of all, it is necessary to overcome inflation; against its background, a low interest rate is meaningless. In the current situation, criticism of the Central Bank is reminiscent of dissatisfaction with a doctor when he prescribes a powerful medicine with side effects to a patient.”

It is obvious that at the current level of the Bank of Russia rate, disputes both within business and within the government about whether the Central Bank’s strategy is optimal and how it can be “creatively supplemented” on its side will intensify.

Therefore, the question of how long the Bank of Russia will keep the rate at the current level of about 15%, or at least significantly higher than current inflation, will be asked even more often. Based on the latest version of the Central Bank’s forecast, a sharp and rapid decline is not expected in 2024 (12.5–14.5% on average per year), and it will become neutral in the understanding of the Bank of Russia (6–7%) only by 2026. The hyperactive struggle of the Central Bank’s partners in the extended government with the negative consequences of a future cooling of the economy, which still looks overheated, is able to add to these figures a few more percentage points to the rate, two or three quarters of strict monetary policy and several months of a “deposit resort” for bank clients.

Dmitry Butrin