Russia Monetary Policy July 2023

Russia: Central Bank hikes policy rate in July

At its meeting on 21 July, the Central Bank of the Russian Federation (CBR) hiked its key policy rate by 100 basis points to 8.50%. This marked the first rate change since September 2022 and came on the heels of sixth consecutive holds.

The Bank’s decision was driven by rising price pressures. Inflation rose to 3.3% in June from 2.5% in May, in part driven by a weaker ruble but also due to the stronger state of the economy: A tight labor market, growing domestic demand and supply tightness for both goods and services all point to an upturn in underlying inflation momentum. On top of that, inflation expectations remained elevated at the outset of Q3.

The CBR was very hawkish in its communique due to a marked rise in pro-inflationary risks over the medium-term horizon, saying that it “holds open the prospect of further key rate increase at its next meetings”. The Bank sees “an increasing deviation of the Russian economy from the balanced growth path” as the key risk, provided that “public sector demand continues to be high, while consumer demand increases further on”. High and unanchored inflation expectations, which are particularly affected by exchange rate fluctuations, and an expansion in the budget deficit are other upside risks over the medium term.

The CBR revised its GDP growth forecasts upwards and now expects activity to expand by 1.5–2.5% in 2023, 0.5–2.5% in 2024, 1.0–2.0% in 2025 and 1.5–2.5% in 2026. Meanwhile, it expects inflation to come in at 5.0–6.5% in 2023, return to 4.0% in 2024 and stabilize close to 4.0% further on.

The majority of our panelists expect the Bank to hike its key policy rate further by year-end. Labor shortages, geopolitics and the public finances remain the key factors to watch in terms of the monetary policy outlook.

The Bank’s next meeting is scheduled for 15 September 2023.

Commenting on the Bank’s decision, Anatoliy A Shal, economist at JPMorgan said:

“The decision to hike 100bp was somewhat of a surprise for a start of a new cycle, which by all the signs should not be very large. The change in macro conditions since last policy meeting […] was arguably not as sharp to justify large moves. Hence, our interpretation is that the CBR either tried to compensate for no move at the previous meeting or just opted for a front-loaded tightening path. […] Our forecast for the policy rate at 9.0% by year-end, but, judging by the tone of CBR’s comments, risks to our rate forecast are skewed to the upside.”

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