Good afternoon,
Today, we have made the decision to keep the key rate at 16.0% per annum.
Last year, we could observe a surge in inflation. This implies that the economy was growing at a pace above its potential. In other words, overheated demand was significantly exceeding capacities to ramp up output. We responded to this by raising the key rate to 16% per annum. Today, we can clearly see how efficient the monetary policy transmission has been. Monetary conditions have become tight, promoting savings and gradually cooling down the demand for loans. As a result, price growth has started to decelerate. Nevertheless, there is still uncertainty about the future pace of these disinflation processes. Therefore, to ensure a sustained return of inflation to the target, we will need to maintain tight monetary conditions for an extended period. Our policy will help decrease inflation to 4.0–4.5% this year and stabilise it at the target further on.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
Current price growth rates were at the peaks last autumn. Inflation trends have weakened primarily owing to the monetary policy tightening. It has had a disinflationary effect through the interest rate, exchange rate and expectations channels. The key rate increase has pushed up credit and deposit rates, which has decelerated the expansion in lending and boosted growth in deposits. As to the exchange rate channel, the high key rate has made ruble assets more attractive, moderating the demand for imports and, accordingly, foreign currency. This has helped stabilise the ruble exchange rate. The pass-through of the ruble weakening that occurred in summer to prices has completed. Finally, financial market participants, households and businesses have started to decrease their estimates of future inflation from extremely high levels.
In December and January, we observed a slowdown in seasonally adjusted monthly price growth compared to the rates recorded in autumn. Moreover, this was largely due to components reflecting sustained price movements. Core inflation edged down. In January, price growth generally remained nearly the same as in December. The only exception was prices for housing and utility services that were rising faster in January. The growth in this segment was largely associated with more expensive health resort services and trips. Apparently, seasonal growth in prices for domestic tourism could strengthen because the Russians have refocused on domestic travel.
Thus, the decline in sustained price movements is already obvious. These disinflation processes might be uneven, but, according to our baseline scenario, they will bring inflation back to 4.0–4.5% by the end of the year as a result of our tight monetary policy.
Secondly, the economy.
Last year, GDP reached 3.6%, which is much higher than was forecast. The main driver was domestic demand. Investment increased most significantly, which is attributed to the structural transformation of the economy. Flash data show that investment activity continues to grow, although more slowly. A major contributor to the economic growth was consumer demand supported by rising wages and lending. Consumption had been soaring until the end of last year. We have not yet received comprehensive data for the beginning of 2024, but our regional branches could see signs of a slower rise in consumer activity in January. Regional differences in consumption and business activity, lending and inflation are analysed in detail in the Regional Economy report.
The strong growth of GDP might also mean a more substantial recovery in economic potential. The need to transition to domestic production has been promoting investment demand and the launch of new production capacities. Last year, the country was actively developing transport and logistics infrastructure. There are examples of import substitution for domestic production in the consumer goods, food, furniture and household chemical manufacturing industries.
Nevertheless, the expansion of the economic potential is always a slow-moving process, while aggregate demand in the economy supported by government expenditures and quickly growing lending has risen much more notably. Consequently, even despite the improved production capacities, the significant surplus of demand, that is, overheating in the economy, had been translating into soaring prices. Apparently, the peak of that overheating was in autumn. As a result of our key rate decisions, the economy has started to gradually return to a more balanced growth path.
We can make such a conclusion because inflationary pressure has been slightly weakening during the past two months, and the labour market has not been tightening further. The demand for companies’ products has been growing somewhat more slowly than before. Our monitoring shows that such estimates are common to most industries. Estimates of demand growth in industries manufacturing investment goods remain high. As regards businesses’ expectations for demand, they stay close to record highs, except in mining and quarrying. Furthermore, labour shortages encourage companies to invest in labour automation and labour productivity growth.
This year, the economy will be growing at a more moderate pace. However, compared to our October forecast, we have raised the estimate of GDP growth to 1.0–2.0% due to household consumption. Next year, the economy will return to steady growth rates. Considering the increase in economic potential and the structural transformation of the economy, its annual growth is expected to reach 1.5–2.5%, which corresponds to the inflation target.
Thirdly, monetary conditions have been tightening further.
The yield curve of federal government bonds has become more negatively sloped, that is, long-term interest rates are lower than short-term ones. Short-term yields remain high, which is associated with market participants’ expectations about the duration of the period of high interest rates. Contrastingly, long-term yields have declined, which is the evidence that financial market participants’ inflation expectations have lowered.
Both credit and deposit rates have been growing further. The expansion of consumer lending has decelerated notably amid rising interest rates and tighter macroprudential requirements. The amounts of new mortgages (seasonally adjusted) have been declining recently. The decrease is faster in the market segment, where the monetary policy transmission is not distorted. Subsidised mortgage lending saw lower issuance compared with the autumn peaks, which is due to the changes in the parameters of the subsidised programmes.Nonetheless, the issuance rate remains high, at the level of early 2023. The expansion of the corporate loan portfolio has slowed down compared to mid-2023. Corporate lending will continue to grow, although more moderately than last year.
At the end of 2023, the saving ratio increased. Saving activity has stayed high in early 2024 as well. Owing to a considerable rise in incomes, households are able to both consume and save more. Nevertheless, higher interest rates, especially amid lower inflation expectations, will be increasing the propensity to save.
Now, I would like to speak of external conditions.
The situation in the world economy is generally better than expected. However, as the main driver of economic growth is the service sector which is less resource-intensive, this does not result in a considerable expansion of the demand for commodity exports.
At the end of last year, exports contracted in terms of both prices and quantities. One of the factors was additional difficulties in foreign trade transactions related to settlements and logistics. In the second quarter, the oil market might shift to a surplus. Non-OPEC+ states are going to actively expand oil production, which might put additional pressure on prices.
Considering these trends, we have revised our forecast for foreign trade, decreasing the estimate of exports for this year, whereas the forecast for imports has changed only slightly. As a result, the trade surplus will be smaller than last year and below the level expected in our October forecast.
Proinflationary risks are still significant.
In the first place, these risks are related to external conditions, including secondary sanctions and deterioration of the situation in commodity markets. Second, there are risks associated with inflation expectations. High and unanchored inflation expectations are more sensitive to short-term rises in prices for certain products and services. This might entail secondary effects on inflation. Third, the response of lending to tight monetary conditions might be weaker if the government maintains extensive subsidised programmes. Finally, in a persistently tight labour market, labour productivity might be growing more slowly than wages, which involves risks as well.
I would also like to mention disinflationary risks. The increase in demand might be slowing down more quickly than expected in our baseline forecast. Besides, if the growth of the economy was driven, to a greater extent, by the expansion of its potential rather than the cyclical component, inflationary pressure might be weaker.
Winding up, I would like to comment on monetary policy prospects.
We have raised the forecast of the annual average key rate by one percentage point. The average key rate will equal 13.5–15.5% per annum in 2024 and 8.0–10.0% per annum in 2025. This is because we need to maintain tight monetary conditions for longer to ensure a sustained return of inflation to 4%. We do see room for a key rate reduction, but our forecast assumes that the key rate will be returning to the neutral range smoothly. The future path of the key rate will depend on the extent to which the nature and pace of disinflation processes will be in line with the objective to bring inflation back to the target by the end of the year.
The discussion that preceded the vote on our today’s decision will be detailed in our new publication — Summary of the Key Rate Discussion. It will be released on 27 February.
Thank you for your attention.
