UPDATE: Central bank predictably raises key rate to 9.5% annually

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MOSCOW, Feb 11 (PRIME) -- Russia’s central bank has raised the key rate by 100 basis points to 9.5% annually, the regulator said in a statement on Friday.

The central bank said that Russia’s inflation has significantly exceeded the October 2021 forecast. Annual inflation growth accelerated to 8.7% in January after some slow-down to 8.4% in December 2021, and amounted to 8.8% as of February 4.

The dynamics mirror the fact that stable internal demand is larger than production options in many industries, while output expansion is restricted by the lack of labor force, the regulator added. High and unanchored inflationary expectations of the households and the businesses have also impacted the inflation figures. In January, inflationary expectations declined, but were still near their 6-year highs.

The pro-inflation factors have resulted in a significant and lengthy upward deviation of inflation from the target. According to the central bank’s forecast, the current monetary policy will force annual inflation down to 5–6% annually in 2022, and to return to the 4% target by the middle of 2023.

According to the central bank, the monetary conditions have turned to neutral from soft. Growth of real inflation and high inflationary expectations prevent the conditions from entering the tough range.

The yields of short-term OFZ government bonds have increased since the regulator’s previous meeting to reflect the market’s key rate expectations, and the yields of medium- and long-term OFZ bonds have grown mainly due to rising geopolitical tensions, the central bank said.

Deposit and credit rates continue to increase, but the dynamics have not yet resulted in more balanced lending. Both the retail and the corporate lending markets are highly active, the regulator said, adding that the current monetary policy will balance the lending market and protect the purchasing power of the deposits.

According to the central bank’s revised forecast, Russia’s gross domestic product (GDP) growth will amount to 2–3% in 2022, to 1.5–2.5% in 2023, and to 2-3% in 2024, which means that Russia’s economy will return to sound growth by the end of 2023 and will then develop at its potential.

If the situation evolves in line with the central bank’s basic scenario, it can further increase the key rate at the next meetings of its board of directors. The next meeting is scheduled for March 18.

Central Bank Chairwoman Elvira Nabiullina said during a news conference that the central bank will continue to tighten its monetary policy and that the key rate can reach double-digit figures in 2022.

She also said that the regulator expects that global inflation of prices for mineral resources and food can continue.

“Central banks of many states speed up tightening of their monetary policies. In the medium term, it can reduce global inflation, but in the short term, it can become a pro-inflation factor for emerging markets. There are additional external conditions, among which further growth of prices for mineral resources, energy sources and other goods including food,” she said.

Nabiullina said that the key rate will be reduced at a slower pace as compared with its increase last year. The central bank still sees the neutral range of the key rate at 5–6% annually.

Russia’s monthly inflation will begin to slow down in the first half-year of 2022, it will be close to the target of 4% by the end of the year in seasonally adjusted terms, and Russia’s economy will return to well-balanced growth in 2023, the chairwoman also said.

She said that the central bank has not yet made a decision on resumption of foreign currency and gold purchases from the open market for the government, which were suspended in late January due to high market volatility. But the central bank can delay the planned purchases until the end of 2023 so that it could minimize the impact on the market.

Nabiullina also said that the central bank continues to prepare for the sale of Otkritie Financial Corporation (FC) Bank, which it has been bailing out since 2017. The regulator received several bids from investors, but still sees an initial public offering (IPO) as a promising option.

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