The Bank of Russia has raised the key rate for the third time in a row – now from 5% to 5.5% per annum. The rationale for today’s decision remains the same: inflation growth is higher than the regulator’s forecasts, as well as the rate of recovery of the Russian economy exceeding expectations. The combination of these factors, according to the Central Bank, can provoke a further acceleration of inflation, in this regard, the Bank of Russia today tightened the signal of its future actions to the maximum, stating the need for a further increase in the rate.
Today’s decision by the Central Bank’s board of directors to raise another key rate was quite expected given the transition to the tightening of monetary policy that began in the spring. The rate was raised for the third time, as in April, by 50 basis points – from 5.0% to 5.5% per annum.
In May, the annual inflation accelerated significantly – from 5.5% in April to 6.0%. As of June 7, the figure rose to 6.15%. The Central Bank expects that inflation will return to the target of 4% only in the second half of 2022.
The growth of inflation in the Central Bank is considered “a reflection of the fact that the steady growth of domestic demand outstrips the possibility of expanding supply in a wide range of industries – against this background, it is easier for enterprises to transfer increased costs into prices.” For several months, inflationary expectations of the population have been close to the maximum values over the past four years, and enterprises continue to grow, exceeding the local maximums of 2019-2020.
At the same time, they add to the Central Bank, a decrease in the propensity of the population to save, associated with low interest rates in the financial market and rising prices, may have a more significant inflationary pressure than expected, but at the same time it may support consumer demand. Continuing to affect the rise in prices and continuing difficulties in production and supply chains, the regulator points out.
The second reason for the rate hike is faster than expected recovery of economic activity…
The demand for labor is growing (although in some industries, for example, in construction, there is still a shortage of it). Given the improved prospects for recovery in the world, the Bank of Russia believes that the Russian economy will return to pre-crisis levels in this quarter. The regulator reiterates that slower rates of vaccination, the spread of new strains of the virus and the related tightening of restrictive measures may slow down further growth in economic activity.
In the context of the final economic recovery, the Central Bank notes, the increased inflationary pressure “may lead to a more significant and prolonged deviation of inflation upwards from the target.” In this regard, the regulator has tightened its signal to virtually the maximum: if after the last meeting it was said that the Bank of Russia would “assess the feasibility of further raising the key rate at the next meetings of the board of directors. The next meeting will take place on 23 July.