Monetary conditions in Russia must be tighter in H2 to bring inflation down to 4% target in good time - Central Bank analysts

MOSCOW. July 17 (Interfax) - Monetary conditions in Russia must be tighter in H2 2024 in order to bring inflation down to the 4% target in good time, Central Bank of Russia analysts said.

"Lowering inflation will require that monetary conditions in the economy will have to remain tight for significantly longer than predicted in April," the Central Bank said following its June board meeting regarding the possibility that its key rate might be hiked at its next meeting.

But the Central Bank Research and Forecasting Department's latest Talking Trends bulletin, published on Tuesday, used more hawkish wording than that, mentioning not just the duration of those conditions but also the need to tighten them.

"In April-June, the disinflation trend unfolded, including because of volatile and one-off factors. However, underlying inflationary pressures in the economy were up as well, although not considerably. Households' and businesses' inflation expectations increased. Banks raised interest rates, which was because the Bank of Russia had tightened its monetary policy signals, among other reasons. Nevertheless, demand continued to expand in 2024 Q2 at a pace exceeding the economy's capacity, while economic and credit activity was high. To bring inflation down to the target and return the economy to a balanced growth path, monetary conditions should be tighter in H2 2024 than in H1 2024. Moreover, they should remain tight for an extended period," the Central Bank analysts said.

"In order to bring inflation back to the target of 4% in good time, it is necessary to ensure tighter monetary conditions as compared to H1 2024," they said.

Tight monetary policy for an extended period can restore the balance and stabilize the labor market by cooling down demand for labor. This will help even out the situation in the labor market and the economy in general, give the length of time needed to adjust the supply of goods and services in the market through investment in new equipment and technology, the analysts said.

The strengthening of the ruble has not yet affected consumer prices, they said. "Moreover, median price growth for goods and services that are highly susceptible to the ruble's exchange rate dynamics increased in May and June, which is likely due to importers passing on increased logistics and payment costs to prices," the report said.

The Central Bank's next rate-setting meeting will be held on July 26.