Russia Monetary Policy February 2023

Russia: Central Bank stays put again in February

At its meeting on 10 February, the Central Bank of the Russian Federation (CBR) kept its key policy rate unchanged at 7.50%. This marked the third consecutive hold and came in line with the expectations of our panelists.

The Bank’s decision came amid stabilizing price pressures and growing pro-inflationary risks. Although headline inflation ticked down to 11.9% in January (December: 12.0%), prices rose at the fastest monthly pace since April. Moreover, inflation expectations among households and businesses remained elevated at the outset of the year. The Bank also noted that economic activity has been stronger than its October forecast in recent months, thus further supporting the decision to keep interest rates relatively high.

Notably, the Bank turned hawkish in its communique; it warned that further widening of the country’s budget deficit—the deficit soared to USD 25 billion in January—may compel it to raise interest rates ahead. According to the CBR, “accelerating fiscal spending, deteriorating terms of foreign trade and [the] situation in the labour market intensify pro-inflation risks”. As a result, the Bank “will consider the necessity of key rate increases at its upcoming meetings”.

Regarding economic projections, the Bank now expects annual inflation to come in between 5.0–7.0% in 2023, before returning to the 4.0% target in 2024. In terms of economic activity, the CBR forecasts GDP to largely stagnate in 2023 and grow 0.5–2.5% in 2024. In 2025, GDP is seen expanding 1.5–2.5%. Geopolitics, global oil prices and the resilience of the Russian economy are key factors to watch going forward. Currently, the majority of our panelists forecast the interest rate to remain stable this year.

The Bank’s next meeting is scheduled for 17 March 2023.

Commenting on the outlook, JPMorgan economist Anatoliy A Shal said:

“We sense the shift to a more hawkish stance is more of a risk management exercise at this stage, which relies more heavily than usual on forecasts than data flow. […] We removed 50bp of rate cuts from our 2023 forecast and expect policy rate to remain flat at 7.5% through the year. Risks are skewed toward moderate tightening in the near term. Our inflation forecast is closer to the lower-end of CBR’s forecast interval of 5-7% yoy at Dec-23, and we think that even if some tightening is delivered, it will prove transitory.”

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