The Bank of Russia said the external environment for the Russian economy remains “challenging” and “constrained economic activity significantly”.
The headquarters of the Russian central bank in Moscow on February 28, 2022. Severe sanctions imposed on Russia by Western capitals in the wake of the February 24 invasion of Ukraine and countermeasures by Moscow have virtually separated the country from the global financial ecosystem.
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Russia’s central bank held its key interest rate at 7.5% for its second consecutive meeting on Friday, but noted rising inflation risks.
The Bank of Russia has cut interest rates six times so far this year. The policy rate was held stable at 7.5% in October, following a cut of 50 basis points in September, down from 8% before. The Bank of Russia last raised rates at the end of February, following Moscow’s invasion of Ukraine, raising its key rate from 9.5% to 20% at the time.
In its Friday statement, the Bank said consumer prices are currently growing “moderately” while consumer demand is “moderate.”
“Inflation expectations of households and firms remain, essentially unchanged, high. At the same time, pro-inflation risks are greater and prevail over disinflationary risks,” the bank said. “This is due to rising inflationary pressures from the labor market, deteriorating foreign trade conditions and softer fiscal policy.”
Russian annual inflation was estimated at 12.7% in December, according to the Bank of Russia, well above its target of 4%. The bank’s own forecasts now predict annual inflation to fall to between 5% and 7% in 2023, before returning to target in 2024.
Going forward, the Bank of Russia will take into account actual and expected inflation dynamics relative to target and economic transformation processes, as well as the risks arising from domestic and external conditions and the reaction of financial markets, in its base rate decisions . .”
Since the invasion of Ukraine, Russia’s economy has been hit by a barrage of punitive economic sanctions from Western powers that have hurt its growth prospects and virtually banished Moscow from the global financial system.
The International Monetary Fund (IMF) forecasts that Russia’s GDP will shrink by 3.4% in 2022 and contract further next year, while annual inflation will reach 13.8% throughout 2022.
However, there is debate among Western economists about the extent of the damage inflicted by sanctions. The IMF has noted near-term signs of resilience in the Russian economy, while others have argued that Russia is facing “economic oblivion”, citing long-term costs of foreign firms leaving and reduced access to critical technology imports and inputs .
Economic outlook remains ‘challenging’
The bank clarifies: “This is mainly due to the logistical problems that still exist in many industries. However, high-frequency indicators point to some growth in business activity in the fourth quarter.”
Russia has vowed to undergo structural economic transformation to mitigate the long-term effects of Western sanctions. The Bank said this initiative caused a change in the “structure of aggregate demand”, with consumer demand remaining subdued.
The Bank said the government’s easing of fiscal policies would begin to support economic activity in 2023.
“The Bank of Russia takes into account the decisions already made regarding the medium-term expenditure path of the federal budget and the fiscal system as a whole,” the bank said.
“In the event of a further widening of the budget deficit, tighter monetary policy may be needed to bring inflation back to target in 2024 and to keep it close to 4% thereafter.”
The Bank added that future policy decisions would take into account “actual and expected inflation dynamics relative to target and economic transformation processes”, along with “risks from domestic and external conditions and the reaction of financial markets”.
The next policy meeting will take place on 10 February.