The Central Bank raised the key rate to 8.5% per annum

After a long pause, the Bank of Russia raised the key rate by 1 percentage point. Until mid-September, it will be 8.5% per annum. Half of the rate increase is “unwinnable” — the Central Bank’s assessment of its neutral level has been raised by 50 percentage points. This is less than expected, monetary policy remains tight, but the chances for a further significant increase in the value of money in the economy, despite the Central Bank’s aggressive rhetoric, are decreasing — as follows from the forecasts of the Bank of Russia, the period of high demand in the economy, outpacing supply opportunities, will not be too long.

The decision of the Board of Directors of the Central Bank to raise the key rate by 100 points at once, to 8.5% per annum, was basically not predicted by analysts – they bet on a rate increase by 0.50 percentage points, to 8% per annum, in some cases stipulating that a larger increase is possible. According to the Chairman of the Central Bank Elvira Nabiullina, the main proposals that were discussed at the meeting – the increase in rates by 75 and 100 points, there were separate opinions on the need for a stronger increase, which, apparently, were not voted.

Half of the decision of the Bank of Russia is a de facto postponed and revised decision from the June meeting of the council, when the rate was once again kept at 7.5% (see “Kommersant” dated June 10) in order to determine the extent of its increase in a few weeks. In this sense, keeping the rate at the same level or symbolically raising it, for example, by 0.25%, was impossible – all the information about the state of the economy and financial markets in June and July spoke of an increase in pro-inflationary risks and the exit of the economy from the trajectory in which future inflation in the future was reduced to 4% per annum in 2024. The second component could be predicted only by those who closely follow the internal protocols of the work of the Central Bank. The point is the changed forecast of the Bank of Russia. Recall that the Central Bank, at least in theory, evaluates the rigidity or softness of its own monetary policy (MP) in relation to an unobservable indicator – the neutral rate. Until the last meeting, its assessment of the Central Bank was 5-6% per annum, and it was assumed that it would be revised – including as a result of the ongoing review of the monetary policy – in August 2023, which will be recorded in the draft Guidelines for the unified monetary policy accompanying the draft budget for 2024-2026. However, nothing prevented the Bank of Russia economists from revising this indicator in their July forecast, which happened, and this almost automatically led to an additional rate increase.

The amount is a fairly sharp increase in the key rate from 7.5% to 8.5% after a multi-month stable rate.

If we assume that both components in the decision of the Central Bank are approximately balanced, then a relatively large step in the decision looks rather moderate, what is happening is ordinary, and the promise of the Bank of Russia to consider the need for an additional increase in the rate at the next meeting is rather a moderately harsh signal than “hawkish” rhetoric.

If we talk about the “opportunistic” component of the rate increase, then (if we consider a standard “step” of the monetary policy to increase the rate by 0.25 percentage points), two steps to increase in the current circumstances is a rather calm reaction of the regulator to slightly increased proinflationary risks. No new pro-inflationary risks were noted in the explanatory model of the Bank of Russia – in this aspect, the only reason for additional inflationary pressure and expectations was the excessively rapid growth of domestic demand, which cannot yet be covered by adequate supply. The Central Bank’s revisions of the forecast for the volume of loans for 2023 are most indicative here: in the April forecast of the regulator, it was expected that the loan in the economy this year would be approximately equal to the loan of 2022 (10-14% growth compared to the previous year, in 2022 it grew by 12%), in the July version for this year, the loan growth rate was set at 13-17%, and the money supply – at the level of 17-21% , with very high growth in mortgage volume (also 17–21%).

At the same time, the Bank of Russia assumes that the summer weakening of the ruble will not affect the volume of imports to the Russian Federation in any way in 2023 or 2024.

However, the ratio of imports to GDP will decrease next year – and this year the estimate of this indicator is even increased. This is a calculated indicator, and the Central Bank, based on the words of Deputy Chairman of the Central Bank Alexei Zabotkin, does not assess whether there is a component of advanced replenishment of import inventories in the relatively high import activity in the Russian economy at the current exchange rate. If there is, it should be behind the uncertainty of importers in the stability of the exchange rate in the coming months and expectations of a weak ruble. The Bank of Russia itself rejects any forecasting of the exchange rate, while the new forecast of the Central Bank only very slightly worsens the estimates of the future surplus of the balance of payments and trade, on which the ruble exchange rate de facto (and rather non-linearly) now depends.

As for the rest, the Central Bank’s estimates of pro-inflationary factors have changed rather quantitatively and insignificantly, rather than qualitatively and seriously. The shortage of labor is increasing, domestic demand is slowly replacing external demand, the exchange rate pass-through continues and will play its role, there are risks of strengthening sanctions and worsening terms of trade, as well as risks of a deterioration in the situation in world trade and the economy. Nothing radically changes in this.

However, the results of the second quarter for the Russian economy gave the Bank of Russia the opportunity to change its estimates quantitatively: Russia’s GDP is probably already growing faster than expected.

This is reflected in the forecast as a change in the GDP dynamics forecast from 0.5–2% for 2023 to 1.5–2.5%, the “delta” between the ranges, apparently, is a measure of “economic overheating” and the reason that the lower limit of the 2023 inflation estimate in the Central Bank estimates has not changed (4.5% per year), and the upper one has increased from 5.4% to 6.5%. Long “overheating” (the controversy of this term for the current situation is obvious and the Central Bank is rather accentuated, in any case, the regulator’s management is trying not to use it) is not expected. “According to the Bank of Russia, the recovery phase of the development of the Russian economy as a whole has been completed,” the press release of the Central Bank states. Confirmation of these assumptions is a strong increase (from 5.5% to 9%) in the projections of the “ceiling” of the range of estimates of final consumption in 2023, with a slight decrease (from 3% to 2%) of the same “ceiling” for 2024.

As for the revision of the neutral rate, the increase in its estimate by only 0.5% is, in fact, very moderate. Back in the spring of 2023, there were reasons to believe that it could grow by 100 points, mainly due to a sharp increase in country risks due to the consequences of the Russian military operation in Ukraine. In August-October 2023, the Central Bank does not intend to revise the level of the neutral rate. Based on the new assessments of the monetary policy, the Central Bank is now definitely tough, although moderately (the regulator itself did not directly say in its communication how it evaluates it), which, apparently, implies that for new strong steps to tighten it, the Bank of Russia will need additional justifications – which are not currently available. However, there is still no more or less accurate data on the future outcome of the agricultural season – a good harvest will be a disinflationary factor.

The first comments of analysts on the decisions of the Central Bank are the expectation of an increase in the rate in September 2023 to 8.75–9% per annum.

It should be noted that the revision by the Bank of Russia of the forecast range of the key rate until the end of 2023 is very moderate — it makes it possible to increase it by three steps by the beginning of 2024, but does not exclude that the rate will remain at the current level for this period. The very demonstrative decision of the Central Bank – to raise the rate by four steps after six “zero” steps – speaks rather not about the “lateness” of the Bank of Russia with such a decision, but about the conscious intention of the regulator to make the signal louder in form while maintaining quite routine content. The post-crisis growth is almost over, the usual one has begun – low, uneven, fairly stable, but hardly outstanding – and, obviously, somewhat lower than what could be counted on a few years ago.

Dmitry Butrin