Bank of Russia increases key rate by 100 bp to 16.00% p.a. (15.12.2023)
On 15 December 2023, the Bank of Russia Board of Directors decided to increase the key rate by 100 basis points to 16.00% per annum. Current inflationary pressures remain high. Annual inflation for 2023 is expected to be close to the upper bound of the
In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets. According to the Bank of Russia’s forecast and given the monetary policy stance, annual inflation will decline to
Inflation movements. Current inflationary pressures remain high. Seasonally adjusted price growth in October—November averaged 10.0% in annualised terms (compared to 12.2% in Q3). As of 11 December, annual inflation was down to 7.1% from 7.5% in November, which was due to the high base effect of early December 2022, when utility tariffs saw an unscheduled indexation. Annual inflation for 2023 is expected to be close to the upper bound of the
Persistent inflationary pressures have increased in recent months. This is due to domestic demand more potently exceeding the capabilities to expand the production of goods and services than the Bank of Russia’s previous estimates. This is evidenced by economic activity data for 2023 H2, including recent monthly data for Q4. Seasonally adjusted core inflation in October—November was up at 11.5% in annualised terms (compared to 9.7% in Q3). One-off pro-inflationary effects in several product markets have also partially contributed to a rise in current price growth in recent months.
Households’ inflation expectations and businesses’ price expectations have increased. Analysts’ inflation expectations remain above the inflation target in 2024 but are anchored close to 4% in the medium term.
According to the forecast of the Bank of Russia, given the monetary policy stance, annual inflation will decline to
Monetary conditions have continued to tighten overall following the rise in the key rate in July—October. Short-term rates of the financial market have increased as market participants revised upwards their expectations regarding the key rate path. In the public debt market, medium- and long-term yields have not changed significantly. Interest rates have continued to rise in the credit and deposit market.
Following the increase in deposit rates, credit institutions are seeing a higher inflow of household funds, including due to cash being returned to bank accounts. Concurrently, some funds have been transferred from current accounts to time deposits.
Some segments of the credit market have shown signs of a slowdown, although overall lending growth rates remain high. Unsecured consumer lending has slowed down in recent months due to both higher interest rates and the impact of previous macroprudential measures. The market mortgage segment has also seen a slowdown, although the overall mortgage lending portfolio has been expanding fast, including due to a large volume of loans issued under government-subsidised programmes. The corporate segment has remained particularly vibrant as lending there expanded faster than in the Bank of Russia’s October forecast. Elevated demand for corporate loans has been driven by both high price expectations and expectations of future changes in domestic demand.
Economic activity. GDP growth in 2023 Q3 and recent monthly data for 2023 Q4 show that economic activity is increasing much faster than the Bank of Russia expected in October. This suggests that the upward deviation of the Russian economy from a balanced growth path in 2023 H2 has proved to be more substantial. This is evidenced by current price growth rates. The Bank of Russia expects GDP growth in 2023 to outperform its October forecast and exceed 3%.
The upward deviation of the Russian economy from the balanced growth path has been mainly driven by domestic demand. The expansion of private demand along with a continuously high level of public demand supports steady growth of domestic demand. The growth in consumer activity is propelled by rising real wages and lending. Significantly increased profits of companies and positive business sentiment, including due to fiscal stimulus, support high investment demand.
Recent data on foreign trade indicate that imports have decreased slightly compared to the peak summer figures, including due to the effects of monetary tightening in place. Concurrently, the decline in exports in recent months has been more pronounced because of deteriorating conditions in global energy commodity markets. In the coming quarters, demand for imports in ruble terms will continue to adjust to recent key rate decisions.
At present, the key supply-side constraint on the Russian economy is related to labour market conditions. According to companies’ surveys, the economy still suffers from significant labour shortages, especially in manufacturing. Unemployment has dropped to a new historical low. Low geographic and cross-sectoral labour force mobility is an additional structural constraint.
Inflation risks. Proinflationary risks remain substantial over the medium-term horizon.
The Bank of Russia’s baseline scenario rests on the Government’s decisions which have already been made regarding the medium-term expenditure path of the federal budget and overall the fiscal system. If the budget deficit increases further, proinflationary risks will rise again and tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4% further on.
Persistently elevated inflation expectations and their further increase pose a significant risk. This will propel lending to continue its rapid expansion, while households’ propensity to save will continue to decrease. As a result, growth in domestic demand will continue to outpace the supply expansion capacity, intensifying persistent inflationary pressures in the economy. Due to limited labour resources, labour productivity growth may lag further behind an increase in real wages.
Geopolitical tensions affecting terms of foreign trade also create proinflationary risks. Increasing foreign trade and financial restrictions can further weaken demand for Russian exports, contributing to inflation through exchange rate movements. In addition, the increasing complexity of production and supply chains and payments due to external restrictions may push up import prices. Significant short-term proinflationary effects may also be caused by a deterioration in the global economic growth outlook and high volatility in global commodity and financial markets.
Disinflationary risks are primarily related to domestic demand slowing down faster due to monetary policy tightening already in place.
The return of inflation to target in 2024 and its further stabilisation close to 4% assume that tight monetary conditions will be maintained in the economy for a long period. In its further key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.
The Bank of Russia Board of Directors will hold its next key rate review meeting on 16 February 2024. The press release on the Bank of Russia Board decision and the medium-term forecast are to be published at 13.30 Moscow time.
