Russia Monetary Policy September 2023

Russia: Central Bank hikes policy rate further in September

At its meeting on 15 September, the Central Bank of the Russian Federation (CBR) increased its key policy rate by 100 basis points to 13.00%. This followed a 350 basis point emergency hike in mid-August and reflected the Bank’s continued efforts to thwart rising inflation and prop up the ailing ruble.

Additional tightening came on the back of elevated inflationary pressures. Inflation jumped to 5.5% in the second week of September, from 4.3% in July and 5.2% in August, chiefly due to pass-through effects from the sinking ruble. Meanwhile, the CBR pointed to significant pro-inflationary risks stemming from the weak ruble and domestic demand growth continuing to outpace output capacity growth. On top of that, inflation expectations among businesses and households continued to increase in recent weeks. Sustained ruble weakness and the deteriorating effectiveness of monetary transmission further supported the Bank’s move.

The CBR remained largely hawkish in its communique, saying that “the return of inflation to the target in 2024 and its further stabilization close to 4.0% implies that tight monetary conditions will be maintained in the economy for a long period.” The outlook remains volatile; the CBR stressed that the progress of the structural transformation of the economy, risks from internal and external conditions, and financial markets’ response to these risks underpin inflationary uncertainty. As such, the Bank “will consider the necessity of further key rate increase at its upcoming meetings.”

With regards to forecasts, this year’s inflation projection was lifted to 6.0–7.0% (from 5.0–6.5%), with next year’s remaining at the 4.0% target. In terms of economic growth, the Bank chopped its forecasts to 0.5–1.5% for 2024 (from 0.5–2.5%) due to cooling domestic demand. The majority of our panelists expect the Bank to stay pat through year-end.

The Bank’s next meeting is scheduled for 27 October.

Anatoliy A Shal, economist at JPMorgan, commented on the Bank’s move:

“[We] remain slightly more dovish vs. CBR communications, as we don’t think the inflation process was contaminated much by FX passthrough or higher inflation expectations and see more space for easing later in 2024. We see the key rate at 9.00% by end-2024 (previously: 8.00%), averaging at around 11.00% next year. With monetary policy tighter than expected, risks to our 2024 growth forecast of 1.5% appear skewed to the downside.”

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