Russia Monetary Policy June 2023

Russia: Central Bank holds policy rate stable, remains hawkish in June

At its meeting on 9 June, the Central Bank of the Russian Federation (CBR) held its key policy rate stable at 7.50%. This marked the sixth consecutive hold and was in line with the expectations of our panelists.

The Bank’s decision was chiefly driven by growing pro-inflationary risks. Headline inflation rose to 2.5% in May (April: 2.3%), and according to the Bank, “the overall balance of inflation risks has tilted even more to the upside”. GDP growth has been stronger than expected in recent months, thanks to upbeat domestic demand, which has propped up inflation expectations among households and businesses. This, coupled with accelerating fiscal spending, deteriorating terms of trade and a tight labor market all point to rising inflation ahead, thus leaving no room for the CBR to cut rates.

In its communique, the CBR reaffirmed its hawkish stance, saying that “given gradually rising inflationary pressures, the Bank of Russia holds open the prospect of increasing the key rate at its next meetings to stabilise inflation close to 4.0% in 2024 and further on.” Moreover, the Bank added that it would take into account “economic transformation processes, as well as the risks posed by domestic and external conditions and the reaction of financial markets”, underlining a volatile geopolitical backdrop.

The Bank did not release GDP growth forecasts in June, having previously estimated activity to increase 0.5–2.0% in 2023. Meanwhile, the CBR confirmed its inflation forecasts at 4.5–6.5% in 2023.

The majority of our panelists expect the interest rate to remain stable this year, although some see a rate hike in H2. Labor shortages, geopolitics, and public finances remain the key factors to watch in terms of the monetary policy outlook.

The Bank’s next meeting is scheduled for 21 July 2023.

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