At the next meeting of the Board of Directors of the Central Bank, a decision was made to increase the key rate to 9.5%, the inflation forecast for 2022-2023 was worsened – it is assumed that the economy will return to a stable state only by 2023. The current instability, apparently in favor of workers, who can count on greater growth in income and expenses, is more difficult for investors. The February rate level is not the limit: in a world where inflation rates have long been record high, the Central Bank is not going to keep credit money cheap for at least another year and a half.
Despite the fact that the increase in the key rate by the Bank of Russia immediately after the decision in December 2021 to increase it by 1 percentage point, to 8.5% per annum, was expected by analysts to be one of the last for the coming months, the February meeting of the Board of Directors of the Central Bank took place in fact in new conditions. The point is not even that, as the head of the Bank of Russia, Elvira Nabiullina, explained at a press conference a couple of hours after the announcement of the decision, the Central Bank did not consider the option of changing the rate by less than 1 percentage point at all – they chose between the adopted option, the new a rate of 9.5% per annum, and an increase in the rate by 1.5 percentage points, immediately up to a symbolic 10% per annum.
Much more effective was the change in the base (in this case, accepting only moderately sharp hypotheses about further developments) scenario of the Bank of Russia’s forecast for the coming years: all other things being equal, it implies an almost inevitable increase in the key rate to 10% per annum and higher in the first half of 2022 of the year.
According to the head of the Bank of Russia, the peak of the cumulative effect of the rate hikes already carried out (recall, the current decision is the eighth increase in a row) should be expected from the second half of this year to the first quarter of 2023. New parameters of the basic version of the Central Bank forecast: the average level of the key rate for 2022 is 9-11% per annum, for 2023 – 7.5-9% per annum. The new forecast for annual inflation for 2022 is 5-6%, on average for the year compared to the previous year (the figure for 2021 is 6.7%) – 6.8-7.7%: it probably follows from this that even with Consistently high, at the current level of 8.7-8.8%, consumer inflation in the first quarter of 2021 alone, the decline in inflationary pressure is not expected to be any quick. The regulator now expects inflation to return to the Central Bank’s “target” of 4% only by the end of 2023 (average inflation for next year is mildly indicated at 4–4.3%).
Thus, the Bank of Russia has decided on its semantic forecast of what is happening: Ms. Nabiullina confirmed to Kommersant that the revised baseline forecast is much closer to the “global inflation” scenario in the autumn “Main Directions of Monetary Policy”.
Recall that back in January 2022, the discussion within the largest central banks of the world about whether the surge in consumer prices in the largest jurisdictions was a short-term event or determined by medium-term factors was with varying success – in any case, based on what the US Federal Reserve is now discussing mainly an increase in the key rate by 0.25 percentage points (January inflation in the United States was 7.5% per annum, 1.2–1.3 percentage points lower than in Russia), supporters of the idea of a short-term inflation surge still retain their positions. It should be noted that the explanatory structure of the current inflation is mainly the “overheating” of the economies due to a faster recovery in demand compared to the possibility of increasing supply plus logistical failures, this is the position of the Central Bank of Russia as well, rather in favor of a short-term inflationary surge. But the decision of the Central Bank and the new forecast of the Bank of Russia are rather in favor of the fact that disinflation and the return of not only the Russian economy (which, like other large developing economies, reacts to a completely non-obvious set of pro-inflationary factors faster than developed economies) will be relatively slow. In any case, not a landslide – for 2022, the inflation targets of central banks around the world, apparently, are completely unattainable.
In general, the new version of the Central Bank’s forecast is quite optimistic and calm for an economy that is experiencing an unexpected and rather strong inflationary shock. Forecasts of GDP dynamics for 2022 have not been changed (2-3% compared to the forecast at the end of October), for 2023 they are slightly worsened (1.5-2.5% against 2-3% of the old forecast). More than before, the increase in final consumption expenditure is expected, especially household consumption. The forecasts for exports and imports have been changed: for 2022, expectations of export growth are slightly weaker, and imports are somewhat stronger than in the previous version, for 2023 – import forecasts have become very uncertain, but worsened in the range (the current version of the dynamics of imports for 2023 is 0.4-2.4% growth, the old version – 2.7-4.7% growth), and export forecasts remained almost the same. Little has changed in credit and money supply projections.
In fact, in the forecast, the Central Bank states: if inflation in Russia is now at its peak plateau, and there will be no further inflation growth in the world, 2022 will be very similar to its beginning with its consumer rush, the largest (and often unsatisfied) increase in demand for non-food products , expensive commodities.
Among the expected consequences of the implementation of this scenario not specifically noted by the Central Bank are the continued growth in real disposable incomes of the population, including wages, and consistently low investment (see Kommersant on February 10).
The Bank of Russia notes the continuing growth of the labor shortage (despite the first-ever observed massive influx of foreign workers in the Russian Federation). This circumstance, we note, additionally “lengthens” the forecasts of disinflation in the economy — with a greater propensity to consume and a decrease in interest in investments, the threat of “labor productivity growth lagging behind wage growth” indicated by the Bank of Russia looks like an inevitability: it can only be removed by investment, them a problem. “The Russian economy will return to a balanced growth path by the end of 2023 and will continue to develop at a pace consistent with its potential,” the Central Bank suggests based on current conditions.
Even if the “inflationary spiral” in the world unwinds slowly (now it is happening in a very benign mode), the Central Bank will most likely have to go for a more rigid monetary policy (MP) in the coming months, that is, additionally and significantly raise the rate.
Based on the words of Elvira Nabiullina, the Central Bank now considers the monetary policy neutral, as a standard, to pay off increased inflationary expectations, a tough monetary policy is required – that is, in the conditions of the first half of 2022, with inflation at the level of 7-8% year-on-year, the rate is obviously higher than 10% per annum.
In addition, the Central Bank does not abandon the idea that a new level of deposit rates for the population should be an alternative to urgent consumption, considered in this scheme as an “absolutely rational” consumer self-defense against inflation – but for now, bank deposit rates are not growing so fast to ensure this effect. .
In any case, the Central Bank’s key rate of 10-11% per annum even before the onset of this spring is a very realistic picture. It is more difficult with the picture of this spring – it will largely be determined not by the decisiveness of the Central Bank, but by the degree of indecision of the FRS and the ECB. Inflation at the level of even 5% per annum for most residents of developed countries is a long-forgotten feeling. But the feeling of positive interest rates has been forgotten in exactly the same way – and in 2022 all the central banks of the world, and not just the Bank of Russia, will have to decide which is worse. It would be very convenient for everyone if the current inflation disappeared along with the pandemic. But so far, neither one nor the other is going to retire, and the Central Bank has to accept this as a fact only a little earlier than its colleagues.
Elvira Nabiullina outbid
The decision of the Central Bank to raise the rate by 100 bp. up to 9.5% was quite expected (see Kommersant of February 7) and in itself had little effect on the financial market. However, the subsequent speech of the head of the Central Bank Elvira Nabiullina with a tough assessment of further actions led to the sale of ruble assets. The dollar exchange rate after 15:30 began to grow steadily and by 18:20 reached the level of 76.17 rubles / $, returning to the values of a week ago. Subsequently, the rate was kept above the level of 76 rubles/$. In addition, according to Maxim Timoshenko, Director of the Financial Markets Department at Russian Standard Bank, the weakening of the ruble was caused by market expectations of a more aggressive Fed rate hike (a closed meeting of governors is scheduled for February 14, the next Fed meeting, at which the rate may be raised, scheduled for March), which reduces the risk appetite of investors in the currencies of developing countries, including the ruble.
Lost in value and debt securities. According to Alexander Yermak, chief debt market analyst at BC Region, the OFZ market reacted extremely negatively to the tough statements of the regulator and to the revision of the forecast for the average values of the key rate for this year. According to him, in order to achieve the upper limit of the forecast, the key rate this year may be increased to 11.5-12%. As a result, OFZ yields with maturities of up to three years soared above 10%, the highest since early 2016, according to Reuters. The yield on government securities with a maturity of up to 10 years rose to 9.75-10% per annum, twenty-year bonds – up to 9.6% per annum.