CBR Governor Nabiullina says Russia's economy still overheating 'significantly'

MOSCOW. July 26 (Interfax) - The Central Bank of Russia, which hiked the key rate to 18% per annum from 16% p.a. on Friday, still assesses the state of the Russian economy as being substantially overheated, and the regulator believes that tightening monetary policy is necessary in order to avoid a stagflation scenario in going forward.

"The rate of growth in GDP remained high in the first and second quarters, while inflation accelerated. This means that the economy is still in a state of significant overheating," Central Bank Governor Elvira Nabiullina said at a press conference following the meeting of the CBR's board of directors.

Nabiullina said that labor and production capacity reserves are "practically exhausted".

"A shortage in these resources could lead to a situation where the rate of economic growth would slow down despite all attempts to stimulate demand, and the entire stimulus would go into accelerating inflation. In essence, this is a stagflation scenario, and it could only be avoided at the cost of a deep recession. Today's additional tightening of our policy should prevent this scenario," Nabiullina said when explaining the bank's decision on the rate.

The investments that companies remit in order to increase labor productivity will have an effect "only over time". Moreover, the ability of businesses to re-equip is technically limited owing to the increased costs for equipment and other resources amid rising inflation and sanctions, Nabiullina believes.

"Although the supply of goods and services should continue to expand under these conditions, this will not happen as quickly as demand is currently growing," Nabiullina said.

The CBR hiked the key rate 200 basis points to 18% per annum on Friday. The regulator also raised its forecast for growth in the country's GDP to 3.5%-4.0% for 2024 from 2.5%-3.5% in the April outlook. The CBR also lowered its forecast for growth in GDP to 0.5%-1.5% in 2025 from 1.0%-2.0%, and to 1.0%-2.0% in 2026 from 1.5%-2.5%. The CBR expects economic growth of 1.5%-2.5% in 2027.

The CBR also substantially raised its inflation forecast to 6.5%-7% for 2024 from the previous expectation of 4.3%-4.8%. The CBR has also raised the inflation outlook to 4.0%-4.5% for 2025 from the previous target of 4%, expecting that annual inflation should continue to be close to 4% going forward given the current monetary policy.