The Central Bank raised the key rate by 25 bps

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AK&M 10 September 2021 15:44

On September 10, 2021, the Board of Directors of the Bank of Russia decided to raise the key rate by 25 bps to 6.75% per annum. In the second quarter of 2021, the Russian economy reached a pre-pandemic level and, according to the Central Bank, is returning to the trajectory of balanced growth, the regulator said in a statement.

The contribution to inflation from stable factors remains significant due to the faster expansion of demand compared to the possibilities of increasing output. Under these conditions, and taking into account high inflation expectations, the balance of risks for inflation is shifted towards pro-inflationary ones. This may lead to a longer deviation of inflation upward from the target. The monetary policy pursued by the Bank of Russia is aimed at limiting this risk and returning inflation to 4%.

If the situation develops in accordance with the basic forecast, the Central Bank admits the possibility of further increases in the key rate at the next meetings. Decisions on the key rate will be made taking into account the actual and expected dynamics of inflation relative to the target, the development of the economy on the forecast horizon, as well as the assessment of risks from internal and external conditions and the reaction of financial markets to them. According to the regulator's forecast, annual inflation will begin to slow down in the fourth quarter of 2021. Taking into account the current monetary policy, annual inflation will decrease to 4-4. 5% in 2022 and will remain near 4% in the future.

Inflation is higher than the forecast of the Bank of Russia. In August, the monthly seasonally smoothed growth rates of consumer prices rose again after slowing down in July. Annual inflation increased to 6.68% (after 6.46% in July) and, as of September 6, amounted to 6.74%. According to the Bank of Russia's estimates, the indicators reflecting the most stable processes of price dynamics continue to be significantly higher than 4% in annual terms.

This is a reflection of the fact that the steady growth of domestic demand is outpacing the opportunities for expanding production in a wide range of industries. Against this background, it is easier for enterprises to transfer increased costs to prices, including those associated with growth in the global commodity markets.

The population's inflation expectations have been near the maximum values for the last four years for more than six months. The price expectations of enterprises remain near multi-year highs. The expectations of professional analysts for the medium term are anchored near 4%.

The prevailing influence of pro-inflationary factors may lead to a more significant and prolonged deviation of inflation upward from the target. The monetary policy pursued by the Bank of Russia is aimed at limiting this risk and returning annual inflation to 4%. In the baseline scenario, annual inflation will begin to slow down in the fourth quarter of 2021. In 2022, annual inflation will decrease to 4-4. 5% and in the future will be near 4%.

Monetary conditions have tightened somewhat. The yields of short-term OFZs increased, reflecting expectations of a key rate increase by the Bank of Russia. At the same time, the yields of medium - and long-term OFZs remained stable. The adjustment of credit and deposit rates to the key rate increases in March-July accelerated. The outflow of funds from term ruble deposits has stopped. At the same time, corporate lending continues to expand at a pace close to the highs of recent years. The growth of mortgage loans slowed down after the change in the parameters of preferential programs. The growth rate of consumer loans remains high. The monetary policy pursued by the Central Bank will increase the attractiveness of deposits for the population, protect the purchasing power of savings and ensure a balanced growth of lending.

In the second quarter of 2021, the Russian economy reached a pre-pandemic level. Operational indicators in the third quarter indicate a continued growth in economic activity, with a slight slowdown in its pace. This, according to the Central Bank, is largely due to the return of the Russian economy to a balanced growth trajectory. At the same time, there is some heterogeneity of trends in the economy in the sectoral and regional context.

The growth of real wages and the low propensity of households to save, due to increased inflation expectations, support the growth of consumer activity, especially in the non-food markets. At the same time, the recovery of the public services sector slowed down in July-August due to a partial tightening of epidemiological measures. Growing domestic and external demand and high corporate profits support investment activity.

Inflationary pressure from the labor market is increasing. The demand for labor is growing in a wide range of industries. At the same time, there is a shortage of it in some sectors, including due to the continuing restrictions on the influx of foreign labor. The unemployment rate is near historical lows, and the number of vacancies is at historical highs. The situation on the labor market indicates that in the future, the increase in the stable growth rates of the Russian economy will primarily be determined by the growth rates of labor productivity.

The balance of risks remains significantly shifted towards pro-inflationary ones. The effect of pro-inflationary factors can be enhanced by increased inflation expectations and associated secondary effects.

Continuing difficulties in production and logistics chains, a shortage of labor resources, as well as structural changes in the labor market as a result of the impact of the pandemic may exert additional upward pressure on prices. The strengthening of the structural shortage of labor resources may lead to a lag in the growth rate of labor productivity from wage growth.

There are still pro-inflationary risks from the price conjuncture of the world commodity markets. The further dynamics of food prices will largely depend on the crop yield in 2021, both domestically and abroad.

Short-term pro-inflationary risks are also associated with increased volatility in global markets, including under the influence of various geopolitical events, which may affect exchange rate and inflation expectations. In the context of a faster recovery of the world economy and, accordingly, the exhaustion of the need for an unprecedented stimulating policy in developed economies, an earlier start of normalization of monetary policy by the central banks of these countries is possible. This may become an additional factor in the growth of volatility in the global financial markets.

Disinflationary risks for the baseline scenario remain moderate. The opening of borders, as restrictive measures are lifted, can restore the consumption of foreign services, as well as ease supply-side restrictions on the labor market through the influx of foreign labor. In particular, low rates of vaccination and the spread of new strains of the virus, as well as the associated tightening of restrictive measures, can slow down the further growth of economic activity.

The budget policy significantly affects the medium-term dynamics of inflation. In the basic scenario, the Bank of Russia proceeds from the trajectory of normalization of budget policy laid down in the Main Directions of Budget, Tax, customs and Tariff Policy, which assumes a return to the parameters of the budget rule in 2022. The Bank of Russia will also take into account in the forecast decisions on investing the liquid part of the National Welfare Fund above the threshold level of 7% of GDP.

If the situation develops in accordance with the basic forecast, the Bank of Russia admits the possibility of further increases in the key rate at the next meetings. Decisions on the key rate will be made taking into account the actual and expected dynamics of inflation relative to the target, the development of the economy on the forecast horizon, as well as the assessment of risks from internal and external conditions and the reaction of financial markets to them.