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For the fifth time in a row: Bank of Russia keeps key rate at 7.5% per annum

Photo by Djim Loic on Unsplash

For the fifth time in a row, the Central Bank of Russia has kept its key rate at 7.5% per annum. This decision was taken by the Board of Directors of the Central Bank at a meeting on Friday, April 28.

According to the regulator, the annual inflation rate in the country fell to 3.5% in March compared with February’s 11%. At the same time, as of April 24, the growth in consumer prices slowed to 2.5% per annum.

“In the annual inflation rate will continue to remain temporarily below 4% in the coming months under the influence of last year’s high base effect. At the same time, according to the forecast of the Bank of Russia, it will& begin& to& increase& gradually& in& the& second half& of& 2023 as& its calculation of& low monthly& price&growth leaves&the& summer& of& 2022,” said a press release from the CB.

According to the Central Bank specialists, the annual inflation rate in Russia may reach 4,5-6,5% by the end of 2023. Meanwhile, already in 2024, the indicator should return to the target of 4% and will remain close to that value in the future, the regulator predicts.

Traditionally, changes in monetary policy (MP) is considered one of the main tools of the Central Bank to control inflation. In the case of a rush of price increases, the regulator raises the rate, as a result of which borrowed money becomes more expensive for citizens and businesses, economic activity declines and price pressure weakens. If, on the contrary, inflation slows down, the central bank can lower the rate to revive business and consumer activity.

In the spring of 2022, against the backdrop of massive Western sanctions against Moscow, inflation in Russia began to rise sharply and at a certain point reached 17.8%, the highest level in 20 years. As an anti-crisis measure, the Central Bank more than doubled its key rate (from 9.5% to a record 20% per annum), which after a while allowed to slow the price growth.

Thus, already in the summer the inflation rate in the country dropped below 15%, and at the end of the year it was 11.9%, which was even better than predictions of the authorities. As the price pressure was easing, the Central Bank started to gradually lower its key rate. In June the regulator returned it to the pre-sanctioned level of 9.5%, and in September it was reduced to 7.5% per annum and since then continues to hold it at this level.

The next meeting of the Central Bank’s Board of Directors is scheduled for June 9. According to the Central Bank press release, in the future the regulator will make a decision on the key rate taking into account the inflation dynamics, the process of structural reconstruction of the economy, as well as assessment of internal and external risks.

“The inflationary expectations of the population and price expectations of enterprises are still at elevated level… Under gradual increase of the current inflationary pressure the Bank of Russia at forthcoming meetings will assess the feasibility of raising the key rate for inflation stabilization near 4% in 2024 and further”, – the Central Bank stated.

Mikhail Seltzer, a stock market expert at BCS World Investment, told that the Bank of Russia may indeed raise its key rate again briefly in the event of a noticeable acceleration in inflation. Nevertheless, the expert does not expect any changes in the monetary policy of the Central Bank in the near future.

“We are not talking about a further reduction of the interest rate either. For this we need pro-inflationary risks to weaken. So in order to protect price stability in the future we will have to temporarily forget about easing the monetary policy for now,” added Seltzer.

Yevgeni Zhornist, the portfolio manager of Alfa-Capital Asset Management Company, holds a similar point of view. In his opinion, the regulator will continue to hold a pause, in order to wait for more definiteness and better understand the balance of risks. At the same time, closer to the end of the year, the Central Bank may lower the rate to 6.5% per annum and continue to decline in 2024, the interlocutor of did not rule out.

According to the Central Bank, economic activity in Russia is currently growing faster than expected at the end of winter. The regulator’s experts attribute such dynamics to an increase in domestic demand and the country’s ongoing adaptation to new external conditions.

Against this background the Central Bank significantly improved its macroeconomic forecast. Back in February the regulator estimated that Russia’s GDP in the current year would decrease by 1%, but it did not rule out the possibility of increasing the figure by 1%. However, now the Central Bank clearly expects the economy to return to a positive trajectory with growth in the range of 0.5-2% in 2023 and 0.5-2.5% in 2024.

“This means that by the Russian economy will reach the level of late 2021 by the end of 2024. In 2025 GDP will continue to grow at 1.5-2.5%,” the Central Bank specified.

Earlier about improving the situation in the Russian economy said the International Monetary Fund. A similar assessment was also voiced in the government and the Kremlin;

“If you look now at the economic picture, it allows us to speak with a certain optimism about what we have… The levels of business confidence of both businesses and the population are at multi-year highs, and in some places they are even at absolute records. GDP will grow by 1-2% for the year as a whole,” Russian presidential aide Maxim Oreshkin said on April 25.

One of the reasons for the optimistic forecasts of the authorities may be the recently observed revival of Russian industry. Vladimir Chernov, an analyst with Freedom Finance Global, shared this opinion with .

According to the Federal State Statistics Service, in March 2023 the volume of industrial production in the country increased by 1.2% year-on-year. The growth was recorded for the first time after 11 months of continuous decline.

“Previously, a number of analysts believed that in March the decline of industry will continue and production will decrease by 1.4%. The growth that occurred may be due to an increase in output in the military-industrial complex, which can last for quite a long time, so the forecasts can be improved slightly,” explained Freedom Finance Global analyst Vladimir Chernov.

In addition, the current situation on the Russian labor market has a positive impact on the economic dynamics, according to investment strategist of MC “Arikapital” Sergey Suverov. According to Rosstat, the unemployment rate in the country dropped to 3.5% in March – the lowest point in the entire post-Soviet period. Against this background, the authorities predict an increase in real wages of citizens on average by 3-5% by the end of the year.

“Due to staffing shortages in a number of industries, wages are also rising, so purchasing power may be higher than previously predicted. As a result, we see a revival of consumer demand, and this should already contribute to the growth of economic indicators,” Suverov explained in a conversation with .

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