The board of the Central Bank of Russia (CBR) at the September 15 policy meeting resolved to increase the key rate from 12% to 13%, following the emergency hike by 350 basis points in August amid ruble weakening. (chart)

The CBR maintains that “inflationary pressures in the Russian economy remains high”, noting in the accompanying press release that most significant pro-inflationary risks came from the growth of domestic demand outstripping the possibilities of output expansion (economy overheating CBR warned about previously) and the weakening of the ruble in the summer months. 

The regulator thus believes that “under these conditions, additional tightening of monetary conditions is required to limit the scale of inflation deviation upwards from the target and its return to 4% in 2024.”

The CBR also worsened its inflation forecast for this year: earlier the regulator expected it to be 5%-6.5%, but upped the guidance for 2023 inflation to 6%-7%.

Further monetary tightening was expected by the market and 20 out of 30 economists surveyed by RBC business portal expected the CBR to keep increasing the key interest rate (16 expected a hike of 100bp). The CBR officials also guided for a rate increase ahead of the September 15 meeting.

Inflation as of September 11 increased to 5.5% year on year after 4.3% in July and 5.2% in August, the CBR estimates. The inflation expectations of the population are also growing: at the end of August they increased from 11.1% to 11.5%.

The analysts surveyed by RBC believe that the CBR could hike the rate again by the end of 2023, which is also in line with the statements of the CBR’s Governor Elvira Nabiullina.

At the press conference of September 15 she said that under current conditions, a long period of tight monetary policy is needed to return to the inflation target of 4% by the end of 2024, as cited by Kommersant daily.

According to Nabiullina, the credit market has not yet adjusted to the previous rate hikes and the banks continue to issue loans on previously approved applications. She also welcomed the recent tightening of the subsidised mortgage loan programme.

Coupled with the “very hawkish signal in its communication” the CBR also increased the average key rate forecast for 2024 (from 8.5-9.5% to 11.5-12.5%), Renaissance Capital wrote, while noting that in real terms, the key rate will in the coming months be at its highest level since 2013. 

“In our view, the time of the CBR transition to policy easing, as in previous similar cycles, will be determined by what will be the sustainable component of inflation beyond the transfer of the ruble depreciation effect to prices, i.e. at the end of 2023 - beginning of 2024,” RenCap analysts believe.

The CBR also maintained its stance on the undesirability of tightening capital controls to influence the ruble exchange rate, calling to rely instead on natural correction factors and already implemented monetary tightening.

RenCap analysts also note that CBR’s 6%-7% inflation forecast for 2023 differs quite significantly from the latest estimates of the Ministry of Economic Development (7.5% guidance for 2023). 

“Given both the announced discussion around preferential loan programmes and the differences in growth forecasts, we would not be surprised that in 2024 we will again see an intensification of the discussion between the government and the CBR around the necessary level of policy tightness,” RenCap wrote.