The rate will wait for news – Newspaper Kommersant No. 202 (7403) of 10/29/2022

The Board of Directors of the Central Bank kept the key rate at 7.5% per annum, for the first time refusing to assess the short-term total direction of “risks, the impact of which on the economy and prices is ambiguous.” In the short term, the Central Bank sees the predominance of disinflationary factors that may well force a reduction in the rate, in the medium term – pro-inflationary ones, in order to avoid which the rate will have to be raised. In general, the regulator’s view of the development of the situation, in which the mobilization factor has now been added, is becoming more pessimistic. The current uncertainty increases the period during which the Russian economy, in the process of adjusting to the new reality, will stagnate or shrink, although the adaptation to shocks in itself is going faster than expected.

The decision of the Central Bank not to change the key rate was more than expected – in any case, most analysts predicted exactly such a development of events and precisely this logic of maintaining the indicator at the level of 7.5%. Nevertheless, in many respects this is a disappointing decision – as it turned out, the Bank of Russia today has as much clarity and confidence in the assessments of what is happening as the rest of the market, that is, not much.

The question of how Central Bank analysts will “calculate” the prospects for partial mobilization, announced on September 21 and officially called on Friday (at least in this wave) completed, was the only new major challenge for the regulator’s board of directors since its last meeting. Among the additional factors, the head of the Central Bank Elvira Nabiullina noted only a decrease in business activity in September 2022 after a relatively high summer. Moreover, it was summer activity, as it is now seen, that could in many ways be described as feverish. It was partly determined by the withdrawal of foreign companies and owners from the market and attempts by Russian owners to take advantage of reduced competition and the appearance of cheap assets for sale, and partly by attempts at rapid import substitution. The fact that this activity began to decline already in September is clearly alarming for the Bank of Russia.

With regard to mobilization, it can be divided into two aspects. The first is the impact on the labor market, which is already very overheated. Based on the comments of the Central Bank, the regulator sees this effect, but in terms of direct influence (withdrawal of 0.3 million workers from the market), it is limited.

Rather, the problem is created by the mobilization of specialists, the consequences of which are difficult to calculate (it is obvious that this enhances the effect, but it is not obvious to what extent). The second aspect is the impact on investment, business and other activities: mobilization here is unambiguously negative. The first component was described in great detail at the Bank of Russia: from the point of view of the goals of monetary policy, mobilization acts first as a disinflationary, then (it is not known exactly how long after) – as a pro-inflationary one. The Central Bank does not directly say anything about the second component, however, one can consider its estimates of business activity as an indirect commentary on what is happening.

In general, in the fall of 2022, the overall set of factors affecting inflation was more likely in favor of the Central Bank — industrial production and seasonal agricultural production were higher than expected, inflation acceleration in September was more likely caused by one-time and random factors (OSAGO and mobile communication tariffs — “if we exclude them, then the price pressure will be below 4% in annual terms,” said the head of the Central Bank).

At the same time, the news background was worse than in summer: the price expectations of enterprises are growing, there is no growth in consumer activity (despite the fact that there are apparently no clear signals for a constant strengthening of savings sentiment either), the risks of a global recession remain, and high lending activity in both retail and in the corporate segments is partly explained by the closing of foreign currency loans (and although the Central Bank increased the forecast for gross lending to the economy in 2022 to 9–12% per annum, there are already signs of weakening activity).

Exactly in the same logic and estimates of GDP dynamics. The good news is that the forecast for a decline in Russia’s GDP in 2022 has been improved to minus 3-3.5% (part of this decision is an additional improvement in the estimate of the balance of payments surplus). The bad news: the Central Bank has revised estimates of the time of recession / stagnation of the economy in 2023, with the same parameters of annual GDP dynamics as before: 1-4% recession, positive dynamics from the fourth quarter of 2023, the recession peak in the middle of next year. Thus, paradoxically, the adaptation to the new economic conditions is happening faster than the Bank of Russia expected, but will last longer than it previously expected. Obviously, the point is not in economic factors – the Central Bank does not have the opportunity to fully engage in geopolitical and especially military analytics, new emerging factors are due to circumstances outside the economy itself. This is probably why Elvira Nabiullina quite clearly explained on Friday the value of maintaining market mechanisms in the current situation in comparison with the mobilization model of the economy: summer successes are the result of the markets. We add that most of the autumn problems are not related to the markets as such, geopolitical discussions, in which these difficulties are increasingly discussed in the fall of 2022 in power structures (including the government), are essentially not supported by the Bank of Russia – in any case, none of their elements have yet been found in the analysis of the Central Bank.

From the statements and comments of the regulator on October 28, we can draw the following conclusion: until the end of the year, there remains the possibility of reducing the key rate, and not a ghost one (the Central Bank announced the actual tightening of monetary conditions in September, October trends look similar). But from the beginning of 2023, the chances will increase that the rate will increase along with inflationary pressures. None of this is said directly in the Bank of Russia. “Over the past month, events have occurred, risks have arisen, the impact of which on the economy and prices is ambiguous,” with these words, Elvira Nabiullina concluded her statement following the results of the board of directors. It is unlikely that she did not have in mind, among other things, the fact that “ambiguous” events of a non-economic plan can easily make any economic forecasts useless.

Dmitry Butrin