Russia Monetary Policy October 2023

Russia: Central Bank hikes key rate by more than expected in October

At its latest meeting on 27 October, the Central Bank of the Russian Federation (CBR) hiked its key policy rate by 200 basis points to 15.00%. This surprised most market analysts on the upside and came on the heels of a cumulative 550 basis point increase between July and September. Soaring inflation and a weak ruble were the key drivers of the decision.

The Bank’s aggressive monetary policy tightening came on the back of intensifying inflationary pressure. Strong domestic demand has been increasingly outstripping the economy’s ability to expand the supply of goods and services. Coupled with rising inflation expectations, strong credit growth and rising government spending, this pushed inflation to a seven-month high of 6.0% in September (August: 5.1%). Continued ruble weakness and the deteriorating efficacy of the monetary transmission mechanism further supported the Bank’s move.

The CBR was hawkish in its communique, saying that “the return of inflation to target in 2024 and its subsequent stabilization close to 4.0% imply that tight monetary conditions will be maintained in the economy for long.” Elevated inflation expectations are likely to increase further, and this will be a major factor preventing inflation from returning to the 4.0% target. Growth in domestic demand will continue to outpace supply, while a tight labor market will add further upside pressure to prices. On top of that, the Bank sees looser fiscal policy as another pro-inflationary factor over the forecast horizon. Further risks stem from geopolitical tensions: International sanctions could further weaken demand for Russian exports, contributing to inflation through currency depreciation.

With regard to forecasts, this year’s inflation projection was lifted to 7.0–7.5% (from 6.0–7.0%). Inflation is forecast to slow to 4.0–4.5% next year and remain at the 4.0% target further ahead. In terms of economic growth, the Bank maintained its forecast of 0.5–1.5% growth in 2024, with GDP now seen expanding

1.0–2.0% in 2025.

The majority of our panelists are currently re-evaluating their forecasts. The Bank’s next meeting is scheduled for 15 December.

Commenting on the inflationary backdrop, analysts at Goldman Sachs said: “In our view, loose fiscal policy has been largely to blame for the sustained price pressures. Although the recent increase in oil price will likely lower fiscal deficits, inflation expectations in September came in at +11.7%, and we continue to believe that the economy is running significantly above potential. We have yet to see indications of growth inflecting and maintain that inflation will peak just under +10% in Q2 2024.” On the outlook for monetary policy, they noted: “The CBR has hiked their key policy rate […] since July, partly in light of the inflation outlook but also due to the shrinking current account surplus. We see the latter as the main constraint of the CBR, as international sanctions will effectively force the CBR to sell off reserves in the event of a current account deficit. To avoid this, we see the hiking cycle as a means to slow elevated levels of import demand while protecting the Ruble.”

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