Friday, September 10, 2021

Russia raises rate 5th time, open to more hikes

     Russia's central bank raised its key interest rate for the fifth time this year and said it was open to raise the rate again to prevent high inflation expectations from pushing inflation further above its target.
     The Bank of Russia raised its key rate by another 25 basis points to 6.75 percent and has now raised it 2.50 percentage points since it began tightening its monetary policy stance in March in response to rising inflation on the back of higher commodity prices and strong domestic demand.
     Inflation in Russia rose to 6.7 percent in August from 6.5 percent, the highest since August 2016, and well above the bank's 4.0 percent target.
     "Inflation is developing above the Bank of Russia's forecast," the bank's board said, adding as of Sept. 6 inflation rose further to 6.74 percent as steady growth in domestic demand exceeds the expansion capacity in a wide range of sectors, making it easier for businesses to pass on higher costs.
     Inflation expectations among households has now held steady at close to 4-year highs for the last six months and Bank of Russia Governor Elvira Nabiullina confirmed her concern over the longer-lasting impact of high inflation expectations, which could keep inflation high for longer than expected.
     "Monetary policy should prevent the inflationary spiral from getting out of control," Nabiullina said, and should respond to transitory factors to the extent they transform into steady factors through higher inflation expectations, especially as it concerns peak inflation expectations by both households and companies over several years as now.
     "As regards the risks to the forecast, their balance is still significantly shifted towards proinflationary ones," Nabiullina said, adding high inflationary pressure in the global economy is also fueling elevated inflation expectations and commercial banks' deposit and credit rates are adjusting more slowly to the central bank's rate hikes so the transmission of its decisions is taking more time.
     The bank's baseline scenario is for inflation to slow in the fourth quarter of this year and then continue to edge down toward the target in 2022.

     The Bank of Russia released its policy decision and a speech by Governor Elvira Nabiullina:

"On 10 September 2021, the Bank of Russia Board of Directors decided to increase the key rate by 25 b.p. to 6.75% per annum. In 2021 Q2, the Russian economy reached its pre-pandemic level and is, according to Bank of Russia estimatesreturning to a balanced growth path. The contribution of persistent factors to inflation remains considerable on the back of faster growth in demand relative to output expansion capacity. In this environment, given high inflation expectations, the balance of risks for inflation is tilted to the upside. This may bring about a more sustained deviation of inflation from the target. The Bank of Russia’s monetary policy stance is aimed to limit this risk and return inflation to 4%.

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings. Key rate decisions will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets. According to the Bank of Russia’s forecast, annual inflation will begin to slow down in 2021 Q4. Given the monetary policy stance, annual inflation will edge down to 4.0-4.5% in 2022 and will remain close to 4% further on.

Inflation dynamics. Inflation is developing above the Bank of Russia’s forecast. In August, monthly consumer price growth (seasonally adjusted) was up again, after a slowdown in July. Annual inflation rose to 6.68% (vs 6.46% in July). According to an estimate as of 6 September, it is 6.74%. Based on Bank of Russia estimates, indicators reflecting the most sustainable price movements are persistently above 4% (annualised).

This largely reflects the fact that steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors. In this context, businesses find it easier to pass higher costs, including on the back of rising global commodity markets, on to prices.

Inflation expectations of households have held close to their four-year highs for more than six months. Businesses’ price expectations remain near their multi-year highs. Analysts’ medium-term expectations are anchored close to 4%.

The dominating influence of proinflationary factors could lead to a more substantial and prolonged upward deviation of inflation from the target. The Bank of Russia’s monetary policy stance is aimed to limit this risk and return annual inflation to 4%. According to the baseline scenario, annual inflation will begin to slow down in 2021 Q4. It is forecast to edge down to 4.0-4.5%in 2022 and will remain close to 4% further on.

Monetary conditions have slightly tightened. Yields of short-term OFZs have risen, reflecting expectations for the Bank of Russia to raise the key rate. Yields of medium- and long-term OFZs have remained steady. Loan and deposit rates are rapidly adjusting to the March-July key rate hikes. The outflow of funds from fixed-term ruble deposits has stopped. At the same time, corporate lending is continuing to grow at rates close to recent years’ highs. Growth in mortgage lending slowed down following changes in the parameters of subsidised programmes. Consumer lending is still growing at high paces. The Bank of Russia’s monetary policy stance will make it possible for bank deposits to become more attractive to households, will protect the purchasing power of savings and ensure balanced expansion in lending.

Economic activity. The Russian economy reached its pre-pandemic level in 2021 Q2. High-frequency estimates suggest that economic activity continued to grow in Q3 albeit at a somewhat slower pace. Based on Bank of Russia estimates, this is largely associated with the return of the Russian economy to a balanced growth path. At the same time, economic trends are diverse across industries and regions.

Growth in real wages and households’ low propensity to save, driven by high inflation expectations, support growth in consumer activity, especially in non-food markets. At the same time, the recovery of the commercial services sector decelerated between July and August due to partially tightened anti-pandemic measures. Growing domestic and external demand and high corporate profits shore up investment activity.

Inflationary pressure from the labour market is intensifying. Demand for labour is growing in many industries. At the same time, some sectors show labour shortages, including due to remaining restrictions on the inflow of foreign labour. The unemployment rate is close to its record lows, while the number of vacancies is at its record highs. The state of the labour market suggests that a further increase in steady growth rates of the Russian economy will primarily be conditional on the growth paces of labour productivity.

Inflation risks. The balance of risks remains significantly shifted towards proinflationary ones. Their effect may be strengthened by elevated inflation expectations and corresponding secondary effects.

Further proinflationary pressure may be caused by remaining disruptions in production and logistics chains, labour shortages, as well as structural changes in the labour market caused by the pandemic. An increase in structural labour shortages may cause labour productivity growth to considerably lag behind wage growth.

Proinflationary risks remain to be generated by price movements in global commodity markets. Further changes in food prices will largely depend on agricultural harvest in 2021 both in Russia and abroad.

Short-term proinflationary risks are also associated with the stronger volatility in global markets caused in part by various geopolitical developments, which may affect exchange rate and inflation expectations. As the global economic recovery is progressing faster and, therefore, the need is no longer in place for unprecedented accommodative policies in advanced economies, earlier monetary policy normalisation in these countries is possible. This may become an additional source of higher volatility in global financial markets.

Disinflationary risks for the baseline scenario remain moderate. Opening up the borders concurrently with a gradual lifting of restrictions may lead to a recovery in the consumption of foreign services and weaken supply-side constraints in the labour market owing to an inflow of foreign labour force. Further economic recovery may be held back by, among other things, low vaccination rates and the spread of new coronavirus strains, as well as the ensuing tightening of restrictions.

Medium-term inflation is largely influenced by fiscal policy. In its baseline scenario, the Bank of Russia proceeds from the fiscal policy normalisation path stipulated by the Guidelines for Fiscal, Tax and Customs and Tariff Policy, which assumes a return to fiscal rule parameters in 2022. In its forecast, the Bank of Russia will also factor in decisions to invest the liquid part of the National Wealth Fund in excess of the threshold level of 7% of GDP.

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings. Key rate decisions will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.

The Bank of Russia Board of Directors will hold its next rate review meeting on 22 October 2021. The press release on the Bank of Russia Board decision and the medium-term forecast are to be published at 13:30 Moscow time."

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 10 September 2021

"Good afternoon,

We have made the decision to raise the key rate by 25 basis points to 6.75% per annum and we hold open the prospect of further rises at the upcoming meetings.

Our today’s decision is based on the following.

First, the economy is returning to a balanced growth path. Although the pandemic persists, economic activity bounced back to its pre-pandemic levels already in the second quarter of 2021. Moreover, excluding the oil sector where production is still limited due to the OPEC+ agreement, output in the economy has not only recovered, but returned to the trend, to the growth path observed before the outbreak of the pandemic. Employment has restored almost completely. According to July data, the unemployment rate is close to its record lows. In other words, a further development of the economy and output growth will predominantly depend on the growth rate of labour productivity. According to the Bank of Russia’s estimate, taking into account the structural measures implemented by the Government, the pace of such balanced, or potential GDP growth, which is the same, will equal from 2% to 3% annually.

Of course, the development of the economy is uneven. The pandemic caused significant changes in the work and everyday life of both households and businesses. As the economy continues to adjust to these changes, the situation is still uneven across different sectors. In addition to the above-mentioned oil industry, passenger transportation and international travel still remain below pre-pandemic levels as well. When restrictions were toughened, public catering and entertainment companies faced a decline in the demand for their services. Nonetheless, a lot of industries are demonstrating steadily higher output and sales than before the outbreak of the pandemic. Specifically, there has been a surge in the demand for durable goods (computers, telecommunication devices, and household appliances) and online trade and delivery services. The lockdown period boosted the demand for countryside housing and better housing conditions in general. These uneven trends across both industries and regions are also described in the Regional Economy report released by our regional branches before the quiet period.

The situation in the labour market also evidences that the economy has not only recovered, but is generally returning to its pre-pandemic growth path. The number of vacant jobs is at its peaks. High demand for labour resources is demonstrated by companies in construction and transport, a whole range of manufacturing enterprises, and in trade. These are the industries that started to bounce back earlier and were recovering faster and where demand exceeds pre-pandemic levels. A further expansion of output is possible through a restoration of the inflow of labour migrants, but — first of all — through an increase in labour productivity. This all means that after the rebound of the economy completes, it will develop more smoothly, at a more gradual pace, as compared to the recovery growth of output observed over the last 12 months.

In a situation when companies experience a shortage of workers or components, monetary policy measures promoting demand will not increase output or consumption. For instance, if the demand for cars rises even more, this will not boost their output, when there are no parts, but will only increase the queues for them and speed up price growth.

As regards inflation, it is above the forecast rate, and inflation expectations remain high.In August, annual inflation was 6.7%. According to the steady indicators of inflation measuring the inflation rate without volatile components, inflationary pressure continued to considerably exceed our target in both August and early September.

Indeed, inflation is impacted by multiple factors that do not depend on our monetary policy. The most important of them are world commodity prices, the country’s fruit and vegetable harvest, and bottlenecks in global supply chains (container shipments, microcircuit manufacture, etc.). It has been stated recently that these factors should be completely ignored if monetary policy cannot influence them.

This opinion leaves out one essential circumstance, namely, the fact that all these factors impact inflation expectations which, in turn, influence consumers’ sentiment and behaviour. Hence, they drive inflation across a wide range of products. Higher inflation expectations boost demand and increase the extent of the pass-through of higher costs to consumers. As a result, companies have the opportunity to almost completely pass costs to prices and thereby maintain or even increase their profits, which in turn discourages them to take efforts in order to reduce costs and improve labour productivity.

Monetary policy should prevent the inflationary spiral from getting out of control. Therefore, it should respond to transitory factors to the extent they transform into steady factors through higher inflation expectations. This is especially relevant when households’ inflation expectations and companies’ price expectations are at their peaks recorded over several years, as they are now.

Third, monetary conditions are adjusting to key rate increases faster.

Over the period after our July meeting, the yield curve of federal government bonds with maturities of up to three years has risen. Furthermore, yields on long-term government bonds remain almost unchanged since last March, when we started to raise the key rate. I would like to remind you once again that the stability of long-term interest rates is crucial for the stability of bank rates on investment loans and mortgages.

Interest rates in the deposit market were growing in July—August. The demand for bank deposits started to edge up. As of the end of July, the outflow of funds from retail time deposits ended for the first time since the beginning of last year. Moreover, it even reversed to a slight inflow in August, according to recent data. Our today’s decision on the key rate will support this trend, increasing the attractiveness of deposits and the propensity to save.

Lending still continues to expand at a fast pace. In July, the annual growth rate in corporate lending remained close to its six-year high. Growth in mortgage lending has slowed down somewhat after the conditions of the subsidised programme were changed, but is still close to its peaks as well. Unsecured consumer lending remains a matter of our great concern as annual growth rates in this segment continue to rise still, including due to the base effects. If the current trends persist, we admit the possibility of additional macroprudential measures to cool down this segment of the credit market, besides those provided for beginning from 1 October.

Monetary conditions continue to adjust to our decisions. At our next meetings, we will consider changes in interest rates and in credit and deposit activity and assess whether these changes are sufficient in order to create such monetary conditions that would help bring inflation back to 4% and stabilise it at this level.

As regards the risks to the forecast, their balance is still significantly shifted towards proinflationary ones.

The key demand-side risk is persistently elevated inflation expectations, fuelled by, among other factors, the still high inflationary pressure in the global economy. Another important risk is that deposit and credit rates are adjusting to the changes in the key rate more slowly than we expect, that is, the transmission of our decisions to monetary conditions takes more time.

As to supply-side risks, logistics problems and bottlenecks in production chains remain a significant risk as these issues may persist longer than we estimate today. The above-mentioned problem of a limited availability of labour resources is another risk, which is becoming increasingly important. Moreover, this problem may become even more serious. This is equally relevant for both the Russian labour market and the constraints experienced by other economies.

A decline in global demand due to a slowdown in the world economy may become a disinflationary risk. This may happen, for instance, in the case of a large-scale new wave of the pandemic, accompanied by extensive lockdowns in the majority of countries. Another scenario where inflationary pressure might also weaken faster in the Russian economy is a quick easing of the restrictions on foreign travel for both outbound tourism and the inflow of labour migrants.

There is a number of factors, the potential impact of which is uncertain today. In the first place, these are the volumes and quality of the grain and vegetable harvest this year both in Russia and worldwide. Moreover, it is still uncertain how steady global inflation is and how fast and extensively other central banks will respond to it.

Winding up, I would like to comment on our future actions.

We hold open the prospect of further key rate rises at the upcoming meetings. We will assess whether it is reasonable to increase the key rate, as well as how long the key rate should be maintained at the level achieved taking into account economic developments, inflation trends, and largely the balance of risks to future inflation, including those associated with persistently elevated inflation expectations.

In addition to the baseline scenario, we also consider various other scenarios of potential developments in the Russian and global economies. The three scenarios describing the key possible circumstances in the external environment were released last week in the Monetary Policy Guidelines for the next three years. Monetary policy will be able to bring inflation back to the target regardless of whether the baseline or an alternative scenario materialises.

Thank you all for your attention."


Post a Comment