Central Bank of Russia holds key rate at 20%, as expected

MOSCOW. March 18 (Interfax) - The Central Bank of Russia's board of directors decided on Friday to hold the key rate at 20% per annum.

"Against the background of a drastic change in external conditions, the sharp increase in the Bank of Russia key rate [to 20%] of February 28 helped sustain financial stability and prevented uncontrolled price rises," the regulator said in a press release following the meeting.

The CBR did not give away any hints about its policy plans after the emergency meeting at which it hiked the rate in February, which was logical amid high systemic risks and uncertainty. Its short commentary contained the neutral wording that "further key rate decisions will be made taking into account risks posed by external and domestic conditions and the reaction of financial markets, as well as actual and expected inflation movements relative to the target and economic developments over the forecast period."

The Central Bank's latest commentary contained a neutral signal: "Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation movements relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets."

GDP forecast

The Bank of Russia expects Russia's GDP to decline in the coming quarters, but measures taken in conjunction with the government will limit the extent of the economic downturn, the regulator said.

"Flash indicators, including the Bank of Russia's business survey, suggest a deterioration of the situation in the Russian economy," the CBR said.

"Businesses in many industries are reporting production and logistic difficulties amid the trade and financial restrictions imposed on Russia. A sharp surge in uncertainly weighs heavily on the sentiment and expectations of households and businesses," the regulator said.

"According to Bank of Russia estimates, GDP will decline over the coming quarters. This decline will be mainly driven by supply-side factors, thereby producing a limited disinflationary effect," the statement reads.

"The stimulus measures being adopted by the government and the Central Bank will limit the scale of economic downturn. A further recovery path of the Russian economy will be largely shaped by the degree and speed of its adjustment to new conditions," the CBR said.

Inflation accelerating

The CBR said it expected annual inflation to return to 4% in 2024.

According to weekly estimates, inflation has accelerated significantly since the beginning of March. The current price dynamics are largely reflected by the surge in consumer demand for certain groups of goods amid increased uncertainty and rising inflationary expectations, as well as the weakening of the ruble since the beginning of 2022.

"The Russian economy is entering a phase of large-scale structural restructuring that should be accompanied by a temporary, though unavoidable, period of heightened inflation associated with the adjustment of relative prices for a wide range of goods and services, among other factors. Businesses adapting to changing external conditions, including restructuring production and logistics chains, should be the determining factor influencing the dynamics of relative prices on the horizon of the upcoming quarters," the CBR said.

The Central Bank notes that pro-inflationary risks have increased significantly and prevail over the entire forecast horizon. In the near term, the effect of pro-inflationary factors could be reinforced by high and untethered inflation expectations. Over the longer term, there remains significant uncertainty about the pace and extent of the adjustment in aggregate supply in the Russian economy in response to the recent tightening of trade and financial restrictions.

The dynamics of the economy and inflation should significantly depend on the decisions taken in the area of budget policy.

"The CBR's monetary policy should create conditions for gradually adapting the economy to the new conditions and prevent uncontrolled price growth. With this in mind, annual inflation should return to 4% in 2024," the Central Bank said.