Friday, February 12, 2021

Russia holds rate and says room for easing exhausted

     Russia's central bank left its key interest rate steady for the fourth time but is optimistic about the economic outlook and while it will maintain an accommodative monetary policy throughout 2021 it is already beginning to pencil in a return to a neutral monetary policy stance.
     The Bank of Russia kept its key rate at 4.25 percent, unchanged since July last year when it wrapped up after nine rate cuts totaling 350 basis points since June 2019. 
     This includes four rate cuts in 2020 totaling 200 basis points from February to July.
     "The economy is bouncing back rather steadily," the bank's governor, Elvira Nabiullina, said in a statement, adding economic activity toward the end of last year had turned out better than expected and it expects growth to continue as fiscal stimulus measures continue in the first half of 2021 and monetary policy remains accommodative to ensure demand recovers from the COVID-19 pandemic.
     "Given the current positive trends, we keep unchanged our forecast of GDP growth at 3-4% for 2021," Nabiullina said, pulling forward its forecast for the economy to reach its pre-pandemic level by late 2021 and not by mid-2022 as previously expected.
     Russia's economy shrank 3.1 percent in 2020, down from 2.0 percent growth in 2019, and the central bank forecast growth of 2.5-3.5 percent in 2022 and 2.0-3.0 percent in 2023.
     The bank's decision to maintain its rate comes only days after the International Monetary Fund (IMF) said it should consider lowering its rate by 50 basis points this year to prevent inflation from falling below the central bank's target of 4.0 percent and forecast it would drop to 3.5 percent by end-2021 without any monetary easing.
     The Bank of Russia clearly doesn't share this view, saying "disinflationary risks no longer prevail over a one-year horizon" and raised its forecast for inflation to end 2021 between 3.7 and 4.2 percent from an earlier 3.5-4.0 percent, and then average 4.0 percent in 2022 and 2023.
     The steady rise in inflation in the last 8 months to 5.2 percent in January due to higher commodity prices and the pass-through from the ruble's earlier weakening is expected to peak in February-March and then decline.
     Looking ahead, Nabiullina said the combination of accommodative monetary policy and the government's package of anti-crises measures had promoted economic revival after the acute phase of the crises.
      "According to our estimates, we consider that the potential for monetary policy easing has been exhausted. It's further easing could additionally increase pro inflationary risks," she said, with the bank assessing the timeline and pace for a gradual return to a neutral stance in order to maintain inflation at its target.

    The Bank of Russia released the following statement followed by the statement by Governor Elvira Nabiullina:

"On 12 February 2021, the Bank of Russia Board of Directors decided to keep the key rate at 4.25% per annum. In December and January, prices continued to grow at an elevated pace. Demand is recovering faster and more sustainably than expected. At the same time, supply-side restrictions are still in place and continue to exert upward pressure on prices. Inflation expectations of households and businesses remain elevated. Accelerated vaccination rates, as well as expectations of additional fiscal support measures in certain countries, contribute to the growth of prices in financial and commodity markets. In this context, disinflationary risks no longer prevail over a one-year horizon, and the Bank of Russia has increased its 2021 inflation forecast to 3.7–4.2%.Moving forward, given the current monetary policy stance, annual inflation will stay close to 4%.

If the situation develops in line with the baseline forecast, the Bank of Russia will determine the timeline and pace of a return to neutral monetary policy taking into account the still high heterogeneity of current economic and price movement trends, actual and expected inflation dynamics relative to the target, economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets. 

Inflation dynamics. Inflation is developing above the Bank of Russia’s forecast. In January, the annual consumer price growth rate rose to 5.2% vs 4.9% in December. This is largely related to the growth in prices in global commodity markets and the continuing pass-through of the ruble’s earlier weakening to prices. These factors may exert more prolonged influence due to the previous growth in households’ and businesses’ inflation expectations and remaining supply-side restrictions. Government measures constrained the growth of prices for certain goods. According to Bank of Russia estimates, current consumer inflation indicators reflecting the most sustainable price movements are close to 4% (annualised). 

Inflation expectations of households have abated; however, they still remain elevated compared to the pre-pandemic period. This is largely related to the increase in prices for certain everyday goods and exchange rate volatility. Inflation expectations of businesses have not changed materially after growing over previous months. Analysts’ inflation expectations for 2021 and the medium term are anchored close to 4%.

The restraining influence of domestic demand on price movements is weakening amid continuing inflationary pressure of enterprise costs. Such supply-side proinflationary factors as a labour force shortage in certain spheres and additional costs of businesses to comply with anti-epidemic requirements are becoming more noticeable. If these factors continue to exert their influence over the coming quarters, inflation might return to the Bank of Russia’s target slower than expected.

According to the Bank of Russia’s forecast, annual inflation will peak in February-March and decline later on. The path of this decline will be determined by the timing of exhaustion of the effect of proinflationary factors and 2020 base effects. The baseline scenario assumes that, given the current monetary policy stance, annual inflation will reach 3.7–4.2% in 2021 and remain close to 4% later on.

Monetary conditions remain accommodative and have not changed substantially since the previous meeting of the Bank of Russia Board of Directors. OFZ yields grew somewhat amid rising inflation expectations, climbing long-term interest rates in global financial markets, and remaining geopolitical tensions. Accelerated vaccination rates, as well as expectations of additional fiscal support measures in certain countries, contribute to the growth of prices in financial and commodity markets. Loan and deposit rates mainly remained unchanged. At the same time, higher price growth and inflation expectations over recent months mean that price lending conditions have slightly eased in real terms. In certain segments, banks continued to ease non-price lending conditions as well. In this context lending expansion continued. Alongside with accommodative monetary conditions, lending dynamics are influenced by the preferential programmes implemented by the Government as well as by regulatory relaxations. When making its key rate decisions, the Bank of Russia will assess the impact of cancelling these anti-crisis measures on monetary conditions.

Economic activity. In 2020, GDP fell by 3.1%. This is less than the Bank of Russia expected earlier. According to the Bank of Russia’s estimates, economic recovery also continued in 2020 Q4. The constraining effect of the worsening epidemic situation on the economy in Russia and worldwide was much less than expected. This is related to the targeted nature of restrictive measures and the significant adaptation of households and businesses to the new conditions. In 2020 Q4, households’ real income continued to recover and unemployment started to decline. 

High-frequency indicators of economic activity suggest that the economic recovery in early 2021 is ongoing. The paces of recovery are set to gain support from better consumer and business sentiment in the context of partially lifted restrictive measures and coronavirus vaccination coverage.

The Bank of Russia forecasts the recovery growth of the Russian economy in 2021 in the range of 3.0–4.0%. However, the scale of this recovery will continue to vary markedly across sectors. According to the Bank of Russia forecast, GDP in 2022–2023 is set to grow 2.5–3.5% and 2.0–3.0%respectively. The medium-term economic growth path will be largely influenced by further coronavirus pandemic developments in Russia and globally, the nature of the recovery of private demand in the context of potential change in consumer and business behaviour, as well as by the path of budget consolidation. Accommodative monetary policy will continue to support the economy throughout 2021.

Inflation risks. Disinflationary risks no longer prevail over the horizon of 2021. The impact of proinflationary factors may prove more protracted and pronounced against the backdrop of a faster recovery in demand as well as previous growth in inflation expectations and the associated secondary effects. 

Upward pressure on prices may be caused by temporary disruptions in production and supply chains in the post-restriction period, as well as by additional corporate costs of protecting staff and consumers from the spread of the pandemic. Proinflationary risks are generated by domestic prices for certain food products, affected by supply-side factors and the environment in the related global markets. 

Short-term proinflationary risks are also connected with stronger volatility in global markets, driven by various geopolitical developments, among other factors, which may have an effect on exchange rate and inflation expectations. Also, given that the global economic recovery is progressing at faster paces than previously expected and the need is no longer in place for unprecedentedly accommodative policies in advanced economies, an earlier monetary policy normalisation in these countries is possible. This may become a further driver of volatility growth in global financial markets.

Disinflationary risks under the baseline scenario are chiefly grounded in a weaker recovery in demand in Russia and globally. The economic recovery may be slowed down by the spread of new coronavirus strains and lower than expected paces of vaccination, among other things, as well as a tightening of restrictive measures. Persistent changes in consumer preferences and behaviour, including a persistent higher propensity to save, and a slower recovery of household incomes might also exert a constraining influence on inflation. 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 through inflows of foreign labour force.

Uncertainty remains as to rather long-term structural effects of the coronavirus pandemic for the Russian and global economies, specifically, the scale of a decrease in the potential of the national economy. Potential global growth may also come under marked pressure from geopolitical factors including rising trade conflicts. The extent of the Russian economy’s deviation from its potential, specifically in the consumer sector, is the core driver of medium-term inflation movements.

Medium-term inflation is significantly impacted by fiscal policy. In its baseline scenario, the Bank of Russia proceeds from the parameters of the federal budget and the budgets of constituent territories reflected in the Guidelines for Fiscal, Tax and Customs and Tariff Policy for 2021 and the 2022-2023 Planning Period, as well as from the announced time frames for the completion of anti-crisis measures of the Government and the Bank of Russia. 

If the situation develops in line with the baseline forecast, the Bank of Russia will determine the timeline and pace of a return to neutral monetary policy taking into account the still high heterogeneity of current economic and price movement trends, actual and expected inflation dynamics relative to the target, economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets.

In the follow-up to the Board of Directors meeting of 12 February 2021 the Bank of Russia released its medium-term forecast.

The Bank of Russia Board of Directors will hold its next key rate review meeting on 19 March 2021. The press release on the Bank of Russia Board decision is to be published at 13:30 Moscow time."

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 12 February 2021:

"Today, we have decided to keep the key rate at 4.25% per annum.

The economy is bouncing back rather steadily. I would like to remind you that at our previous meeting we expected economic revival to pause at the end of 2020. However, GDP statistics and high-frequency indicators evidence that this did not happen. Moreover, inflation also exceeds our expectations.

I will further on dwell on the factors, which we were taking into account when making our decision today.

I will start out with the situation in the economy. It has turned out to be better than we expected, and there is a range of reasons for this. First, the restrictions in autumn and winter were not as tough as in spring. Second, both households and businesses were better prepared for the resurgence of coronavirus cases and adjusted faster. Credit activity did not decline, and consumer demand remained unchanged, including owing to a rise in online purchases. Third, external demand for Russian exports also turned out to be higher than our expectations.

We assume that demand in the economy will be recovering steadily further on, promoted by lending expansion amid accommodative monetary policy, mass vaccination, and an improvement in household and business sentiment.

Over the acute phase of the crisis, budget spending considerably supported the real sector. The effect of stimulus measures is expected to continue in the first half of the year as well. Further on, the scheduled fiscal policy normalisation will reduce the extent of this influence. Nonetheless, the budget will remain expansionary as compared to the long-term parameters provided for by the fiscal rule.

In these conditions, economic growth will continue owing to a further revival of both domestic and external demand. The recovery of domestic demand will be driven by the cancellation of restrictions as the epidemic situation improves, especially in the service sector. External demand will be boosted by a rebound in the global economy. Disinflationary demand-side pressure will thus be decreasing overall.

Given the current positive trends, we keep unchanged our forecast of GDP growth at 3–4% for 2021. Furthermore, the economy may reach its pre-pandemic levels already by late 2021, and not by mid-2022, as we assumed earlier. This will become possible primarily as a result of a less significant decline in 2020.

The second factor is inflation. Annual inflation sped up to 5.2% in January, exceeding the Bank of Russia’s target. This elevated inflation rate largely resulted from the pass-through of the ruble weakening and price growth in global commodity markets. According to our estimates, the contribution of the pass-through of the exchange rate movements to annual inflation approximated one percentage point. The contribution of high prices in food markets was slightly lower yet substantial. Given increased inflation expectations and supply-side restrictions, these factors may have a longer-lasting effect on prices.

The pass-through of last year’s ruble depreciation to prices still continues, although it is waning. Recently, prices could be affected not only by ruble exchange rate fluctuations in 2020 H2, but also its weakening in spring, when enterprises were unable to revise their prices immediately due to a slump in demand. Eventually, the combination of the two episodes of the ruble depreciation may be a reason why inflation expectations will stay elevated for a longer period.

Upward pressure on domestic prices persists due to the situation in global commodity markets, first and foremost in food markets. Food prices have risen because of reduced inventories and unfavourable weather conditions. Moreover, the growth of prices for cereals increases costs in meat product manufacturing and is not only a proinflationary factor in itself, but it may also entail secondary effects. It is worth noting that the new mechanism of export duties in grain markets will smooth out the influence of global price fluctuations on domestic prices.

Finally, inflation is still affected by a group of factors associated with the epidemic situation. It includes staff shortages in a number of industries, increased costs incurred by companies to comply with sanitary and epidemiological rules, and persistent temporary delays in supplies due to disruptions in logistics chains. These are supply-side factors putting upward pressure on inflation.

Given the nature of these processes, we estimate that annual inflation will pass its peak in February—March, after which it will be going down incrementally. This will become possible as the impact of the above proinflationary factors is gradually exhausted. Beginning from March, the statistical base effect will also play a significant role in the decrease in annual inflation. Taking into account the monetary policy pursued, we forecast that prices will grow by 3.7%—4.2% over the year.

The third factor we were taking into account when making our today’s decision is that monetary conditions remain accommodative. While nominal interest rates on loans and deposits changed only slightly, real price conditions were eased. Banks also continued to ease non-price lending conditions in a range of segments. Yields on federal government bonds increased somewhat amid the growth of long-term interest rates in global financial markets.

Owing to the monetary policy pursued and the Government’s anti-crisis support measures, the increase in the banking system’s claims on companies accelerated to 10.2% last year, which is more than in 2019. The growth rate of claims on households equalled 12.9%. The economy and borrowers obtained the funds they needed to more smoothly overcome the acute phase of the crisis and resume development.

In 2021, monetary conditions will remain accommodative, further promoting lending expansion, despite the expected gradual termination of preferential programmes. The banking system’s claims on companies are forecast to increase by 7–11% this year, and those on households — by 14–18%,largely as a result of the accelerated expansion of mortgage lending.

As regards fluctuations in banking sector liquidity observed in recent months, they had no impact on monetary conditions. As before, the Bank of Russia preserved money market rates close to the key rate. This became possible owing to the streamlined operational procedure which is efficient amid both a deficit and a surplus of liquidity.

Today, we have published the Bank of Russia’s updated baseline forecast. It relies on the following assumptions:

First of all, external conditions have become more promising. The global economy is expected to grow faster owing to mass vaccination and additional fiscal stimuli in advanced economies. This will strengthen external demand for Russian exports. Therefore, we have increased our forecast of oil prices from 45 to 50 US dollars per barrel for 2021 and 2022. Nonetheless, our forecast remains conservative given the high uncertainty about a potential further spread of the pandemic. According to our estimates, a faster recovery of the demand for oil may translate to a greater extent into a rise in oil output rather than oil prices.

As regards the 2022–2023 horizon, our forecast remains unchanged. The economy will expand by 2.5–3.5% in 2022 and by 2–3% in 2023. Given the monetary policy pursued, inflation will return to the target at the end of 2021 and stay close to 4% further on.

I will now speak on possible risks to the forecast. Disinflationary risks do not prevail any longer in 2021. Moreover, this is generally a balance between proinflationary and disinflationary risks over the forecast horizon. 

Proinflationary risks include, first and foremost, a possible rise in prices in global commodity markets. Second, the epidemic situation remains one of the least predictable factors. Its potential worsening will be the reason why companies’ costs will stay high, with goods transportation problems and production chain disruptions persisting. Third, inflation expectations may remain elevated for a long period of time. Fourth, it is worth emphasising that economic rebound may be uneven and involve local price spikes in individual segments. For instance, as restrictions are lifted in the service sector hardest hit by the pandemic, an increase in demand amid an insufficient rise in supply may become a temporary proinflationary factor. The scale and duration of its impact will depend on a new balance between demand and supply, households’ behaviour, changes in consumer preferences, and the pace of the cancellation of restrictions on foreign travels. Fifth, we still take into account persistent geopolitical risks as they may affect yield trends and inflation and exchange rate expectations.

The second group of risks include disinflationary factors.  First of all, the fiscal policy normalisation may have a more significant influence on final demand and, accordingly, price movements. Second, the uncertainty regarding future consumer behaviour remains. During the quarantine and long self-isolation period, a lot of people abandoned some services, formed new consumption preferences, and changed their mode of life. We do not know whether they will become steady and how they will be influencing price trends. Third, after the boundaries are reopened, it is natural to expect that the demand will shift towards outbound tourism services. As labour migrant flows and logistics chains restore, this will become a disinflationary factor. Finally, as the restrictions are eased, companies will be able to reduce their costs for the sanitation of their premises and the anti-pandemic protection of their staff and customers, which will ease pressures on businesses’ costs.

In conclusion, I would like to comment on monetary policy prospects. The accommodative monetary policy and the Government’s package of anti-crisis measures have been promoting economic revival after the acute phase of the crisis. According to our estimates, we consider that the potential for monetary policy easing has been exhausted. Its further easing could additionally increase proinflationary risks. Nonetheless, monetary policy will remain accommodative on average throughout 2021, supporting the recovery of the Russian economy. The baseline scenario provides for a gradual return to neutral monetary policy. We will assess the timeline and pace for this return taking into account our goal to maintain inflation at our target."


Post a Comment