what does this mean for the economy and the population
The Central Bank of Russia has further tightened its monetary policy: at the meeting on September 13, the key rate was raised from 18% to 19%. At the same time, as reported by the head of the regulator Elvira Nabiullina, the increase step was primarily discussed at the meeting, although the scenario of maintaining the rate was also considered. The Central Bank linked its decision to the insufficient slowdown in inflation - the annual growth of the indicator may be higher than the forecast due to growing inflation expectations and still high lending rates. The decline in prices for oil and other raw materials also has a pro-inflationary effect - the regulator will assess its extent at the next meeting in October, at which, judging by the rhetoric of the Central Bank, the rate may be raised again.
The Bank of Russia's Board of Directors has decided to raise the rate by another 100 basis points to 19%, citing the fact that current inflationary pressure remains high and annual inflation may be higher than the July forecast of 6.5-7%. "We considered three options: maintaining the rate, raising the rate to 19% and to 20%. But we specifically considered the increase from 19% to 20% after the inflation statistics were released in August," Elvira Nabiullina explained.
The Central Bank in its statement allowed for the possibility of raising the rate at the next meeting on October 25 (the macro forecast, including for inflation, will also be updated at that time). Let us recall that when raising the rate in July from 16% to 18%, the Central Bank predicted that its average value in the second half of the year would be 18–19.4% — this means that there is room for a new increase.
The Central Bank is particularly concerned about the state of stable inflation components — these indicators are currently in the range of 6–8% per annum. Another obstacle to disinflation is growing inflation expectations, which have been rising among the population for the fourth month in a row. Business price expectations have also increased, most noticeably in retail trade.
The tightening of the Central Bank's policy is not prevented by the emerging signs of economic slowdown (in particular, the business climate indicator value going into negative territory in September). For now, the regulator finds it difficult to assess whether the cooling is caused by a decrease in demand or increased restrictions on the supply side (increased inflation indicates that the imbalance here remains). At the same time, the slowdown in wage growth (an important indicator of the state of the labor market) continues to outpace productivity growth (and therefore increases inflationary pressure). In addition, there is a possibility, the Central Bank believes, that producers view the current cooling in demand as temporary.
In the event of a more pronounced impact of supply shocks, additional tightening of monetary conditions will be required - the Central Bank will have to additionally adjust demand to the limited supply of goods and services, explained Elvira Nabiullina.
The Ministry of Economy’s forecast, which assumes GDP growth of 2.5% next year versus 0.5–1.5% in the Central Bank’s July baseline forecast, is closer to the disinflationary scenario, which the Bank of Russia considers less likely.
The pace of lending in the economy remains high: a slowdown is observed in the retail segment, as well as in corporate lending, which is less tied to government demand. Corporate lending continues to grow at a high rate (in July - by 21.4% year-on-year). It should be noted that earlier in the commentary on monetary conditions, the Central Bank indicated that maintaining a relatively large share of project financing and other loans at rates below market rates, including preferential ones, is holding back the growth of corporate lending rates.
Another source of risks is the external sector: for Russia, trends in the oil market are pro-inflationary, Elvira Nabiullina noted. Previously, the Central Bank assumed that trade dynamics could affect inflation differently, depending on which effect is more pronounced: for example, a strengthening of the exchange rate could increase the availability of imports, while sanctions restrictions, on the contrary, increase transaction costs and reduce their availability. Now the state of the current account is also affected by a decrease in export prices and export volumes: against the backdrop of weak external demand, oil companies have reduced production in accordance with the OPEC+ agreements. "In general, the structure of global demand is becoming less energy-intensive. This may limit demand for our export goods," the Central Bank notes. A slowdown in the growth of the world's largest economies may lead to an additional drop in demand for raw materials, which, in turn, will put pressure on Russian exports and, through them, on the ruble exchange rate.
It should be noted that the rate hike was expected by most analysts after the previous meeting, but the statistics published this week raised doubts about whether this will be done in September. According to Oleg Kuzmin, Chief Economist for Russia and the CIS at Renaissance Capital, the observed stability of consumption is associated, in particular, with the effect of demand redistribution over time and its “borrowing” from the future. This puts additional pressure on inflation and, on the one hand, forces the Central Bank to raise rates, and on the other hand, will lead to a noticeable cooling of the economy in the future, which will allow the Bank of Russia to subsequently begin a cycle of rate cuts. The economist estimated the probability of the “hard landing” scenario with GDP growth next year of only about 1% and inflation falling to 4.6% at 65%, the remaining 35% falls on the “soft landing” scenario with GDP growth in 2025 by 2% and inflation remaining significantly above the target (5.4% versus 4%).
How the key rate changed
