(Bloomberg) — Russia’s central bank kept interest rates unchanged but signaled it will consider hikes at its coming meetings should risks to inflation worsen.
(Bloomberg) — Russia’s central bank kept interest rates unchanged but signaled it will consider hikes at its coming meetings should risks to inflation worsen.
Policymakers held their benchmark at 7.5%, in line with the forecasts of all economists surveyed by Bloomberg. But in a shift of tone, the central bank said in a statement accompanying the decision that higher borrowing costs could soon be in play.
“If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase,” it said. The central bank also improved forecasts for the economy this year and moved its average rate guidance for 2023 higher by half a percentage point.
Speaking to reporters after the decision in Moscow, Governor Elvira Nabiullina didn’t rule out the possibility of more monetary easing in 2023 but said a rate hike is more likely than a cut this year. The ruble traded little changed after the announcement on Friday.
“This year the probability of a rate increase exceeds the probability of its reduction,” Nabiullina said. “The rationale of changing the rate will be determined by how the situation develops.”
Official borrowing costs haven’t changed since the central bank paused its steep monetary easing cycle that more than reversed an emergency hike after the invasion of Ukraine almost a year ago. But it’s now having to navigate risks to the economy from sanctions while inflationary pressures rise with heavier spending on the war in Ukraine.
Cheaper money has helped Russia avoid a sharp recession despite sweeping international sanctions. Between April and September last year, it delivered 12.5 percentage points of cuts in six steps to bring rates below their pre-war level.
The central bank’s latest forecasts didn’t change the outlook for inflation but now see the possibility that the economy will grow this year. It also projected that domestic demand will improve so much that imports will reach $384 billion in 2023, or $44 billion more than it had expected earlier.
“Consumer demand remained subdued at the end of 2022, but, from the beginning of 2023, it has been showing signs of recovery amid improving consumer sentiment,” the central bank said.
What Bloomberg Economics Says…
“After last year’s rapid easing, the Russian central bank’s signal has turned more hawkish. While it hasn’t fully ruled out further easing just yet, ultimately it is fiscal policy that will drive monetary policy this year. If the government’s spending surge continues, the central bank will be pushed to reverse some of last year’s easing.”
—Alexander Isakov, Russia economist. For more, click here
Conflicting economic priorities are emerging as the stranglehold of sanctions hurts government revenue and spending on the war puts a strain on public finances.
The central bank has been focusing on threats to inflation stemming from budget outlays, growth in nominal wages and labor shortages as a result of the Kremlin’s call-up of men to fight in Ukraine. Weekly price growth is nearing levels last seen more than half a year ago and inflation expectations for a year ahead, a key factor for policymakers, remain close to 12% despite dropping for three straight months.
President Vladimir Putin’s government is meanwhile pressuring the Bank of Russia to turn more upbeat about the outlook for the economy and even signal it’s ready to loosen monetary policy, Bloomberg News reported this week.
While Russia has been faring much better than first forecast, it ended last year with a surprise deterioration in key areas such as the consumer sector that accounts for about half the economy. Retail sales plunged more than 10% in December on an annual basis, even as real wages and disposable incomes rose while unemployment stayed at a record low.
The statistical effect of a high base last year has sent annual inflation readings down below 12% in December — from a peak of near 18% in April — and put it on track to reach the central bank’s 4% target this spring.
Economists are taking sharply different views about the likely path of monetary policy in the rest of 2023.
Goldman Sachs Group Inc. is in a small minority predicting a hike already next quarter. But a majority that includes Barclays Plc, JPMorgan Chase & Co. and Bloomberg Economics takes the opposite view and sees rates falling in the months ahead.
Among the outliers, Goldman’s call for the key rate to end the year at 8.75% is 2 1/2 percentage points above S&P Global’s prediction, according to forecasts compiled by Bloomberg.
“Large budget spending combined with a modest response on the demand side will result in an uneasy choice for the Russian central bank,” Alfa-Bank analysts said in a report before the rate decision.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.