Russia’s Central Bank of Russia (CBR) kept rates on hold at 16% as expected at its monetary policy meeting on March 22, despite slowing inflation and falling inflation expectations amongst the population. (chart)

The central bank said that “current inflation pressures are gradually easing but remain high” and that “seasonally adjusted price growth in February remained at its January level” (of around 6-7% in annualised terms). The central bank more or less repeated its view that “it is premature to judge the pace of future disinflationary trends” and maintained its assessment that “the balance of inflation risks is still tilted to the upside”.

Russian inflation declined very slightly in March, falling from March 12 to March 18 by 0.1% to 7.6% from 7.7% in February, according to Rosstat.

Russia’s economy is running hot having put in 3.6% growth in 2023 thanks to heavy military spending that has produced a military Keynesianism effect to boost growth far beyond Russia’s economic potential currently estimated to be 0.3-0.5%.

That has driven up inflation and forced the CBR to hike rates to growth-crushing level of 16% from 13% at its December meeting. As the inflation is not dependent on monetary emissions, the central bank will have few opportunities to cut rates this year.

However, inflationary pressures do seem to be in retreat as global inflation has been falling steadily in the last six months.

Food prices in Russia fell for the first time since late summer last year, although rising airfare prices contributed to a significant rise in prices for services. Retail prices for gasoline, as well as for non-food products in general, showed moderate growth, reports Renaissance Capital.

“There’s little sign in the communications of a softening in the central bank’s hawkish tone and any suggestion just yet that it is looking to reverse the aggressive monetary tightening it delivered last year,” said Liam Peach, an emerging market economist with Capital Economics. “The latest inflation data have been encouraging but the central bank is waiting for a further easing in price pressures. We still think that inflation will end the year above the central bank’s 4.0-4.5% target due to rapid economic growth and loose fiscal policy, but it’s looking more likely to us that the central bank might start an easing cycle in the third quarter once inflation has clearly reached a peak.”

The CBR’s successful inflation targeting policy and decisive action since the war started has also helped to push down inflation expectations.

The population’s inflation expectations (on a one-year horizon) decreased by 0.4 percentage points in March for a rise to 11.5%, according to InFOM.

“This is the third consecutive decline [in expectations] since the December peak, and the current level is in line with last year's average,” Rencap said in a note. “Price expectations of enterprises monitored by the Bank of Russia have been declining for the fifth month in a row amid reduced cost pressures.”

According to the CBR’s March macroeconomic survey, price expectations, the share of respondents expecting prices to rise in the next three months, minus the share expecting them to decrease, decreased by 0.5 percentage points. to 18.7%, which is the lowest level since the summer of 2023, but still noticeably above long-term averages, Recap reports.

“Analysts have revised their inflation forecast upwards to 5.2% in 2024 (+0.3 p.p. compared to the February survey). Analysts expect that inflation will return to the target of close to 4% in 2025 and remain at this level further on,” the CBR said in its March survey of analysts.

The trends emerging in March in terms of price growth rates and inflation expectations form a neutral background for the Bank of Russia’s decision on the key rate, says Rencap.

“In general, the unchanged key rate… on 22 March is an outcome that is not surprising given that the consensus of interviewed experts and, more importantly, a set of statistical indicators pointed to the unchanged rate [decision],” Rosbank analysts commented.

Rosbank notes that the CBR’s press-release continues to point to a tight labour market, and an excess of demand over supply despite the effect of the increased interest rate for a little over a quarter. In terms of overheated demand, Rosbank suggests that “perhaps the non-monetary nature of consumer optimism (return to income growth)” remains strong.