On July 26, 2024, Bank of Russia Governor Elvira Nabiullina announced a decision to raise the key rate to 18% per annum. This decision was influenced by several factors that have materialized, including rising underlying inflation, persistent consumer activity, an unchanged positive output gap in the economy with growing labor market tightness, and new proinflationary risks associated with sanctions.
Nabiullina stated, "Price growth rates have been persistently high in recent months. Underlying inflation accelerated in 2024 Q2. The first weeks of July suggest that elevated inflationary pressures have been sticky." She further noted that households' and businesses' inflation expectations remain elevated, prompting an upward revision of the inflation forecast for this year to 6.5–7.0%. Inflation is expected to decrease to 4.0–4.5% next year and stabilize close to 4%.
Regarding the economy, GDP growth rates remained high in the first two quarters of 2024 while inflation accelerated, indicating considerable overheating. "Labour force and production capacity reserves have been almost exhausted," said Nabiullina. She warned that resource shortages might slow economic growth despite attempts to boost demand, potentially leading to stagflation unless mitigated by policy tightening.
Nabiullina also addressed monetary conditions over the past six months: "The expansion of the demand for loans has significantly exceeded our estimates." Factors such as record-high profits and expectations of budget payments have driven enterprises to increase variable rate borrowing rapidly. Additionally, subsidized mortgage lending programs contributed to a strong credit impulse.
The governor highlighted external conditions where export values remained stable annually in Q2 2024 while import dynamics were subdued due to cross-border settlement difficulties and tight monetary policy impacts.
In her concluding remarks on future policy directions, Nabiullina emphasized the importance of maintaining a high key rate for an extended period: "We will be keeping the key rate high for as long as needed to bring inflation back to the target and stabilize it at this level."
###