Bank of Russia Governor Elvira Nabiullina announced today that the central bank has decided to raise the key rate to 19% per annum. This decision follows a series of measures aimed at tightening monetary conditions in recent months.
"Monetary conditions have continued to tighten," Nabiullina stated, noting that the expansion of lending, particularly in the retail segment, has slowed. Despite these efforts, inflationary pressures remain high. "Underlying inflation is still higher than the rate needed for returning to the target next year," she said.
Nabiullina highlighted several factors contributing to persistent inflation. "Price pressures remain high due to both underlying and volatile components," she explained. She pointed out that prices for fruit and vegetables did not fall as much as expected over the summer, while items like petrol and dairy products became more expensive.
The Bank of Russia expects inflation to exceed its July forecast of 6.5-7.0%, with adjustments planned for October's core meeting. Tight monetary conditions are seen as necessary but not yet sufficient to bring inflation back to target levels by next year.
Concerns about rising inflation expectations among households and businesses were also addressed. "Our concerns are associated with inflation expectations as they have been rising among households for the fourth consecutive month," Nabiullina noted.
Economic growth was described as unbalanced, with demand dynamics not matching supply capabilities. Labour market constraints were identified as a significant factor limiting output increases. "The unemployment rate has dropped to a new historical low again," she said, adding that staff shortages remain high despite slower wage growth.
Sanctions-related logistics issues and reduced oil output under the OPEC+ agreement have further limited supply in the domestic market. Despite a slowdown in consumer and investment activity, overall demand remains high.
Nabiullina emphasized that monetary conditions need further tightening if supply shocks primarily drive economic slowdown. Since July's key rate revision, financial markets have responded with rising short-term federal government bond yields and declining long-term bond yields, indicating lowered long-term inflation expectations among market participants.
Retail lending expansion has notably slowed due to previous decisions and other factors such as changes in subsidized mortgage programs and tightened macroprudential policy. Corporate lending continues at a fast pace.
External conditions were also discussed, with global economic expansion slowing down particularly in the industrial sector while services show better dynamics. The structure of global demand becoming less energy-intensive could restrain demand for Russian exports.
Declining crude prices linked to global economic trends pose pro-inflationary risks for Russia. Lower export prices led to a slight contraction in exports during July-August while imports remained steady, shrinking the foreign trade balance.
Nabiullina outlined internal risks including full utilization of production capacities and labor force leading only to price increases without output growth if demand stimulation continues. Inflation expectations remaining high pose additional risks along with potential geopolitical pressures affecting major economies and commodity demand impacting Russian exports and ruble exchange rates.
Fiscal policy will be crucial in future decision-making, considering budget revenues, expenditures, deficit levels, and fiscal policy normalization pace when updating forecasts in October.
Disinflationary factors include potential faster reductions in demand or significant increases in economic potential and labor productivity over time.
In conclusion, Nabiullina reiterated the goal of returning inflation to 4% next year: "We consider it necessary...to ensure this we are ready to maintain tight monetary conditions." She emphasized protecting household savings against depreciation, making long-term loans affordable only when inflation is low, preventing constant ruble weakening against trading partner countries' currencies due to higher domestic inflation rates compared internationally; ensuring price stability by avoiding double-digit inflation scenarios which would complicate regaining control over price levels significantly impacting society negatively overall if left unchecked above manageable thresholds beyond current projections towards sustainable targets aimed at achieving stable economic environments conducive towards balanced growth prospects aligned strategically amidst prevailing uncertainties globally influencing national contexts accordingly requiring vigilant oversight consistently monitored proactively addressing emerging challenges effectively through coordinated efforts collaboratively undertaken systematically implementing prudent policies judiciously fostering resilient outcomes 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