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UPDATE 2: Central bank raises key rate to 4.5% for 1st time since 2018

(Adds comments after paragraph 9)

MOSCOW, Mar 19 (PRIME) -- The Russian central bank has raised the key rate to 4.5% annually for the first time since the end of 2018, according to a statement seen by PRIME on Friday.

"The consumer price increase in the first quarter exceeded the forecast of the Central Bank of Russia. Recovery of local demand has become stable and exceeds expectations. In some regions, it exceeds production growth,” the statement said.

“Expectations of foreign demand are improving on the back of additional measures of budget support in some states and a higher vaccination rate. Inflation expectations of the population and business remain elevated. The balance of risks changed to pro-inflation."

Inflation amounted to 5.7% annually in February after 5.2% in January, and accelerated to 5.8% as of Monday. According to the central bank, people spend money saved from unavailability of foreign tours on the purchase of goods and services.

The consumer price growth will peak in March and then start to decline. Inflation is to return to 4% in January–June 2022.

The balance of risks has shifted to inflation because pro-inflation factors may persist for longer than expected amid consumer demand growth and restricted production capacities. Elevated inflation expectations can exacerbate the situation. Global market volatility is also creating short-term risks.

The credit and deposit rates in the banking system remained virtually unchanged, while the medium-term and long-term OFZ yield increased due to the growth of interest rates on the global financial markets. But in some sectors, the capacity of raising production lags behind demand. The rates of vaccination and budget support measures across the globe will affect the Russian economy recovery in 2021 and in the next few years.

Economic activity is recovering faster than expected as more and more companies have reported returning to the pre-pandemic output level. Retail is also recovering on abolishment of restrictions.

The authority said that fast recovery of demand and high inflation pressure have formed the need to return to a neutral monetary policy.

CHAIRWOMAN’s COMMENT

Chairwoman Elvira Nabiullina said that the authority cannot delay the return to a neutral monetary policy, otherwise it will have to raise the rate more. "We need to start to return to a neutral monetary policy right now because time matters. If we delay the rate increase, inflation can grow and inflation expectations will not fall, this will take inflation farther from the goal and a more significant rate increase will be needed in future," she said.

The central bank might not need to raise the key rate to 5–6% in 2021, Nabiullina said.

Annual inflation is near the peak and will begin to decrease in April, mostly on the base effect, Nabiullina said, adding that consumer price growth will be lower than the current level by the end of 2021 but higher than 4%.

The economy will return to the pre-crisis level already in 2021, the chairwoman said. The central bank will revise the gross domestic product (GDP) forecast in April.

The central bank advocates the discontinuation of cut-rate loan programs after the acute phase of the economic decline ends. “We insist that any programs of permanent activity be limited and targeted. Otherwise, not only the budget but the most of economy that will face higher interest rates will suffer," Nabiullina said. The cut-rate 6.5% mortgage must continue only in regions with low new housing commission rates and only until the end of 2021.

The authority does not expect that the key rate rise would slow down the lending and recovery of economy.

Russians' norm of savings will be gradually falling in 2021 until it reaches the pre-pandemic level, she said. Nabiullina also spoke against prolonged food price control measures, saying that they are causing an inflation rise. Price regulation must also not make problems for companies in their project fulfillment.

Possible U.S. sanctions on the Russian state debt can cause short-term ruble fluctuations but carry no systemic risks, Nabiullina said. The central bank is ready to provide liquidity to banks in case of state debt sanctions. The central bank does not rule out that the borrowing program for 2021 will be reduced but it will not affect the budget deficit and inflation.

CEO of Russia's biggest lender Sberbank German Gref said that the bank would consider raising retail loan rates a little. "The fixed rates on loans to households, we have not reacted to this (key rate increase) obviously but we will probably consider the situation in the coming weeks. We are likely to adjust them upward a bit," he said. Gref added that deposit rates can also grow.

End

19.03.2021 16:20
 
 
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