Russia Money (ann. var. of M2 %)

Money in Russia

Central Bank stays put, remains hawkish in April

At its meeting on 28 April, the Central Bank of the Russian Federation (CBR) kept its key policy rate stable at 7.50%. This marked the fifth consecutive hold and was in line with the expectations of our panelists.

The Bank’s decision was underpinned by pro-inflationary risks and came despite the sustained easing of price pressures. Headline inflation plunged to 3.5% in March (February: 11.0%), although it was mostly due to a large base effect. That said, inflation expectations of households and price expectations of businesses remained elevated in April, with significant labor shortages and Russia’s wide budget deficit set to add further upside pressure in the months ahead. As such, inflation is seen resuming an upward trajectory in the coming months, shutting the door on any rate easing by the Bank; policymakers reportedly only considered a hold or a rate hike at the April meeting.

In its communique, the CBR maintained its hawkish stance in April, saying that “given gradually rising inflationary pressures, the Bank of Russia’s forthcoming Board meetings will consider the necessity of key rate increases to stabilize inflation close to 4.0% in 2024 and further on”. Moreover, the Bank noted that “in case of a further expansion in the budget deficit, tighter monetary policy may be required to return inflation to target in 2024”.

The Bank revised its economic projections in April. Policymakers now expect GDP growth to fall within a range of 0.5–2.0% in 2023, compared to a previous projection of a 1.0% increase. Meanwhile, the CBR lowered its end-2023 inflation forecast to 4.5–6.5% from 5.0–7.0% and revised its forecast for the current account surplus downward to USD 47 billion from USD 66 billion.

The majority of our panelists expect the interest rate to remain stable this year. 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 9 June 2023.

Commenting on the monetary policy outlook, analysts at Goldman Sachs said:

“The CBR had previously introduced a hiking bias into its message and published an update on its average key rate forecast from a range of 6.5%-8.5% to 7.0%-9.0% for 2023 […]. We think this supports our long-held view that the CBR will initiate a hiking cycle around the middle of the year and we expect rates to rise to an above-consensus 9.0% by Q1 2024. This view is based on an assumption that fiscal policy will remain loose into 2024, putting upside pressure on import growth and hence the exchange rate as well as keeping the labour market very tight.”