Updated rate forecast does not envisage reduction this year - Nabiullina

MOSCOW. July 26 (Interfax) - The Central Bank of Russia in its new key rate forecast does not envisage rate reduction this year, Central Bank Governor Elvira Nabiullina said.

She said that at the beginning of the year, both analysts and the regulator said reduction was imminent going by the data available at that time.

"What did we see at the beginning of the year from those data? That current inflation had slowed significantly from its autumn peaks, inflation expectations had eased, labor market tensions had at least stopped growing, monetary conditions had tightened, growth in consumer activity had slowed down, and at the same time the population's propensity to save has grown. This was reflected in the forecasts of experts and in our forecast. At the time, our forecast based on the data available at the beginning of the year envisaged room for rate reduction this year," she said at a press conference following a meeting of the board of directors, which decided to hike the key rate 200 bps to 18% per annum.

"Perhaps the confidence of experts, the financial market, and business was underpinned by the fact that over 10 years of inflation targeting, this was the first case of cyclical overheating, when rates need to stay high for an extended period to cool demand," Nabiullina said.

"Our updated rate forecast does not assume a rate cut this year," she said.

Also, comparing the current situation with the episodes of 2014 and 2022, Nabiullina said the difference was that the peak rates in those years were short-term, since they were associated with risks to financial stability, external shocks. Demand fell then not so much in response to a rise in rates, but as a result of external shocks, but now high rates are a response to demand overheating, despite the fact that all other demand factors are working to expand it.

"This is the fundamental difference, and a full understanding of how long rates need to stay high has only emerged in recent months. If you've noticed, as new information has emerged, we've started to emphasize that returning inflation [to target] will require a longer period of tight monetary conditions, and last month we started saying that we're prepared to raise rates if inflation risks materialize," she said.