On June 7, 2024, Bank of Russia Governor Elvira Nabiullina announced the decision to maintain the key rate at 16% per annum. This decision follows a period marked by a pause in the deceleration of current inflation and sustained high economic growth rates.
Governor Nabiullina highlighted that recent data does not allow for any unambiguous conclusions about the future development of the Russian economy. The baseline scenario assumes that economic overheating will start decreasing in Q2 2024. However, an alternative scenario requiring an additional key rate increase has become more likely. This will be a focal point of discussion at the core meeting in July.
Regarding inflation, Nabiullina noted that the key rate increase in H2 2023 helped slow down price growth. However, April and May data indicated a potential pause in disinflation, with current price growth rates returning to 6% annualized terms in April and remaining elevated in May. One-off factors such as indexation of prices for domestic cars and communication services contributed to this trend. Additionally, households' inflation expectations rose again in May after four months of decline.
Economic activity remains strong with GDP up by 5.4% year-on-year in Q1 2024 and nominal wages growing over 20% annually in March. Despite these figures potentially being influenced by leap-year effects and large annual bonuses, there is evidence of substantial economic overheating.
High-frequency data from regional branches indicate signs of slower growth in demand and economic activity, particularly lower producer prices and reduced output in sectors like mining, quarrying, metallurgy, and construction.
Monetary conditions have somewhat tightened with significant rises in yields across all maturities on federal government bonds. Despite this tightening, lending to businesses and households continues to surge.
Households' saving activity remained high with a ten-year maximum saving ratio recorded in Q1 2024. High deposit rates have encouraged savings despite competition among banks for depositors leading to increased deposit rates.
Externally, global economic prospects remain consistent with the baseline forecast. Stable demand for Russian exports is expected as global growth rates stay high. However, import dynamics might be affected by payment problems due to sanctions which could have a pro-inflationary effect if they persist long-term.
Nabiullina outlined several risks to the forecast including deviations from balanced growth paths, persistent labor shortages, rising inflation expectations, and geopolitical risks.
The alternative scenario suggests that supply lags behind demand leading to accelerated or entrenched inflation at current levels for an extended period. Additional data on lending, economic activity, labor market conditions, and inflation are needed before making substantive assessments regarding this scenario by July.
The governor also touched upon fiscal policy changes announced by the Government including tax reforms aimed at increasing profit tax and introducing more progressive personal income tax scales which should have a neutral overall influence on inflation but may have secondary effects depending on expenditure structures.
In conclusion, Governor Nabiullina reaffirmed the Bank of Russia's commitment to returning inflation to its target of 4%. Should persistent inflationary pressures not ease or pro-inflationary risks materialize further increases in the key rate may be considered necessary come July.
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