Good afternoon,
Today, we have made the decision to keep the key rate at 16.0% per annum.
Inflationary pressures have been gradually easing, while lending, consumer and investment activity remains high. It is so far impossible to say that the slowdown of inflation has become steady. Given the strong economic data, we have revised our medium-term forecast. This year, GDP will increase more significantly, and inflation will be decelerating somewhat more slowly than we forecast in February. To return inflation to the target of close to 4%, we will need to maintain tight monetary conditions for a longer period.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
It was considerably lower in 2024 Q1 compared to 2023 Q4. By March, current seasonally adjusted price growth had decreased to 4.5% from 6.3% in February. However, this deceleration was attributed largely to one-off factors. In particular, fruit and vegetable prices had declined notably, which is not really typical of early spring. In April, price dynamics might be higher than in March, while the overall downward trend in current price growth will remain. Most measures of underlying inflation also decreased in March. According to our estimates, they are now closer to 6% in annualised terms. Households’ inflation expectations that have been declining for four consecutive months also suggest an easing of price pressures.
Nevertheless, at the moment, we still do not observe the economic trends that are generally typical of steady disinflation. The expansion of demand still outstrips the capacities to ramp up supply. This is a significant source of inflationary pressure.
Taking into account the actual data on economic activity, the updated forecast provides for a longer path of a decrease in inflation to the target. This year, prices will go up by 4.3–4.8%. The forecast of inflation for the next two years remains unchanged at 4.0%.
Secondly, the economy.
After a slight deceleration at the end of last year, the economy again expands steadily. The growth of consumption over January—February significantly exceeded our forecast. The labour market tightness has been intensifying which reflects rising demand for labour. This trend is observed in almost all regions. For more details, see the April issue of our Regional Economy report.
Considering the current situation in the economy, in our baseline scenario, we have revised upwards our estimate of GDP growth for this year to 2.5–3.5%, while maintaining the forecast for 2025 unchanged at 1.0–2.0%. This scenario implies that, starting from 2024 Q2, the economy will be shifting towards more balanced growth rates. The demand and supply gap will be contracting gradually, supporting the deceleration of price dynamics. In this case, the accumulated effect of the key rate increase will be sufficient to bring inflation back to the levels close to the target already by the end of this year. If the situation evolves this way, it will be possible to start cutting the key rate in the second half of the year. The choice of a particular moment will depend on how quickly current price growth rates will be declining. If disinflation is too slow, we might need to keep the key rate at the current level until the end of 2024.
Another scenario that we discussed as an alternative one is possible as well. It assumes that the expansion of the demand for goods and services will continue to considerably outstrip the capacities to expand production. The signals of such overheating would be a surge in consumer activity and lending, as well as intensifying labour market tightness. All these factors would be influencing the dynamics of inflation and inflation expectations. Accordingly, if the disinflation process halts, we even might be forced to raise the key rate. I would like to emphasise that this is not the baseline scenario.
Anyway, whatever the scenario, the structural transformation of the Russian economy will continue. The surge in investment is partly associated with the recovery of the potential lost by the economy in 2020 due to the pandemic and in 2022 because of the geopolitical shock. Nevertheless, the main reason is exactly the structural increase in investment activity. This is driven by the fact that the economy now focuses more on the domestic market, whereas the share of net exports has been shrinking. High profits in the corporate sector will contribute to the growth of domestic investment. Russian companies’ overall financial performance reached nearly ₽34 trillion over the past 12 months.
Economic activity is still greatly influenced by the public sector demand, which is a guiding indicator for many companies. However, the government demand is less responsive to the key rate than the private sector demand. This means that the key rate has only an indirect effect on part of demand in the economy. Therefore, to ensure price stability, the economy might need higher interest rates. We will update and, possibly, raise the estimate of the neutral key rate when preparing the Monetary Policy Guidelines.
Thirdly, the tightness of monetary conditions has generally remained the same since March, although different indicators have been demonstrating diverse dynamics.
Since our previous meeting, yields on federal government bonds have risen. Moreover, their growth has been more significant in the long-term segment. As a result, the inversion of the yield curve has decreased. There is no decline in the financial market activity. As a result of high profits over recent years, companies are able to raise both equity and debt financing despite tightening price conditions.
Lending continues to surge. Companies’ demand for long-term loans raised to finance investment projects remains high. The expansion in the retail segment is driven primarily by car loans and credit cards. As expected, the growth of unsubsidised mortgage lending is somewhat slowing down.
Today, we have decided to further tighten the macroprudential measures in retail lending. From 1 July, we will raise the risk-based add-ons for consumer loans with a total cost of loan (TCL) from 25% to 40%. This decision has been made in response to the evidence of riskier loans accumulating in banks’ portfolios. According to the leading indicators of credit quality, overdue debt on loans issued since October 2023 has been growing. Furthermore, from 1 July, we will introduce the first add-ons for car loans issued to borrowers with debt service-to-income ratios (DSTI) above 50%. These measures have been taken into account in our forecast and today’s key rate decision.
We have raised the forecast of credit to the economy by 2 percentage points to 8–13% for this year, having considered the actual dynamics, and lowered it by 1 percentage point to 7–12% for 2025.
Households’ saving activity remains high. As people’s incomes, including wages, are growing, households are able to both save and consume more. As a result, even though the saving ratio is rising, consumption is still surging.
Now, I would like to speak of external conditions.
The world economy continues to expand rapidly, although there are now signs of a slowdown. On average, prices for Russian exports have risen since the beginning of the year. The intensifying sanction pressure and the threat of secondary sanctions are still the main constraint on foreign trade. The need to adjust logistics and payment chains to these factors, apparently, partly became one of the reasons for a faster contraction of imports in 2024 Q1. Exports exceeded expectations, driven by an increase in the quantities of non-oil and gas exports and higher oil prices.
Considering the actual data and the growth prospects of the world economy, we have updated the forecast of the balance of payments. According to our estimates, exports and imports will be slightly higher over the entire forecast horizon than expected in February. The current account surplus this year will total $50 billion, just as in 2023, and decrease to $44 billion in 2025.
I will now speak briefly of possible risks to the forecast. As before, the ratio of risks is shifted towards proinflationary ones.
In the first place, this is persistently high domestic demand. As regards high consumer demand, the main risk is associated with labour productivity lagging further behind wage growth. With respect to investment demand, risks are related to hurdles in importing equipment, including due to new settlement issues. Acute staff shortages remain a key issue for companies in planning investment projects.
Inflation might be decelerating more quickly than in the baseline forecast if significant investments over the past two years have influenced the economy’s potential more significantly than we currently estimate.
In addition, the expected adjustment of fiscal policy parameters in connection with the Presidential Address might also have a notable effect on further dynamics of the economy and inflation.
Winding up, I would like to comment on monetary policy prospects.
The decisions to raise the key rate made last year have helped considerably weaken the persistent inflationary pressures. The effect of these decisions will slow down inflation to 4.3–4.8% by the end of this year. We are ready to keep the key rate at high levels as long as needed to ensure a steady return of inflation to the target. The forecast of the annual average key rate for 2024 and 2025 has been revised upwards. It will stay in the range of 15.0–16.0% per annum this year and 10.0–12.0% per annum next year.
Thank you for your attention.
