Option to hike key rate to be considered also at June meeting of Russian Central Bank board - deputy governor

MOSCOW. May 21 (Interfax) - The option of hiking the key rate will also be considered at the meeting of the board of directors of the Central Bank of Russia in June, Central Bank Deputy Governor Alexei Zabotkin told reporters.

"I think that the alternative scenario [hiking the rate] will be substantively considered at the June meeting. How significantly the judgment about the likelihood of its implementation will change will be clear based on the results of the discussion," Zabotkin said on the sidelines of the Vedomosti conference.

Zabotkin said that data from the April board meeting strengthens the case for maintaining tight monetary policy for an extended period.

"Data that have arrived since the last board of directors, including data on inflation expectations, generally strengthen the arguments in favor of maintaining the degree of tightness of monetary policy at a high level for an extended period," Zabotkin said.

He said inflation in Russia was above the mid-point of the Central Bank's forecast, which is 4.3%-4.8% for 2024. "We'll discuss the extent to which this creates risks for the forecast range at the board meeting," Zabotkin said.

He said additional data on weekly price growth and operational statistics on lending will be published by the time of the board meeting on June7. "We'll not have full inflation for May by the June meeting. This somewhat complicates the interpretation of the May data as of the time of the meeting," he said.

The Central Bank will also take household and business inflation expectations into account.

"If we talk about the inflation expectations across all households, these have increased, but remain in the same range as they have been for the last few months. If we look at the inflation expectations of households with savings, they haven't changed significantly and remain at the lower bound of the range for the last few months. Let's see what the monitoring of businesses tells us regarding the price expectations of businesses," Zabotkin said.

In monetary policy, the Central Bank will take tax policy decisions into account, but general figures on the consolidated budget deficit are more important for the regulator,

"What is fundamental for us is the extent to which windfall taxes are commensurate with additional expenses. It is important for us that the trajectory of the normalization of fiscal policy, which was set in the budget for 2024-2026, and on which we now base our monetary policy decisions, remains unchanged in terms of the structural deficit trajectory. The details of the breakdown by taxes also matter, but this is much more secondary than the overall numbers," Zabotkin said.

Annual inflation in Russia rose to 8.05% as of May 13 from 7.84% at the end of April from 7.72% at the end of March 2024, going by weekly figures - the Central Bank advocates this methodology to measure inflation.

Household inflation expectations rose to 11.7% in May from 11% in April.

Russian GDP grew 5.4% year-on-year in Q1 2024, the State Statistics Service (Rosstat) has said in a preliminary estimate. The Russian Economic Development Ministry has also estimated GDP growth at 5.4% in Q1, the Central Bank - 4.6% and analysts in a consensus forecast for Interfax - 5.3%.

The Central Bank's board of directors decided at its April 26 meeting to hold the key rate at 16% per annum, but it also thought about hiking it to 17%. Central Bank Governor Elvira Nabiullina said following the April meeting that rate reduction might begin in the second half of the year, but that the rate might remain unchanged until the end of 2024 if disinflationary processes are too slow.

As an alternative scenario, the Central Bank holds open the possibility of a rate hike. In this scenario, growth in demand for goods and services will continue to significantly exceed the opportunities to expand production. "Such overheating will be signaled by a rapid expansion of consumer activity and lending, and a tighter labor market. All this will affect the dynamics of inflation and inflation expectations. As a result, if the disinflation process comes to a halt we are not ruling out an increase in the key rate. I will emphasize that this is not the baseline scenario," Nabiullina said in April.