Elvira Nabiullina raises her baton: High key rate and lowering inflation

MOSCOW, July 26. /TASS/. The Bank of Russia plans to keep the key interest rate high for a long time and does not rule out raising it, the regulator’s governor Elvira Nabiullina said at a press conference following a meeting of the regulator’s Board of Directors, which earlier today decided to raise the key rate to 18% per annum for the first time since December 2023.

Raising the key rate

Inflation is accelerating, while consumer activity is not cooling down, new inflationary risks have been realized due to sanctions, and the labor market is becoming more rigid – all “triggers” for raising the key rate from 16% to 18% per annum have been realized, Nabiullina said.

The absolute majority of the members of the Board of Directors of the Central Bank was in favor of raising the key rate, but there were also arguments for keeping the rate unchanged, and there were also proposals to raise the rate to 19% and 20% – “to the level where it will be possible to talk about the end of the rate hike cycle with a high degree of probability,” she added.

According to her, today’s decision to raise the rate to 18% per annum “will prevent” the possibility of stagflation in the Russian economy. The regulator intends to keep the rate “high for a long time” in order to “return and consolidate inflation at the target.”

At the same time, the Bank of Russia does not rule out “a further increase in the key rate” and the updated forecast “does not imply a rate cut this year.”

The “Turkish” scenario

The Bank of Russia will not follow the Turkish scenario and raise the key rate sharply. “Inflation there has accelerated to 80%, the annual rate is still around 70%, and the key rate has been very low for a long time, so in Turkey it had to be raised in fairly large steps,” Nabiullina said. But the situation in Russia is “in no way comparable to Turkey,” so this option is not being considered, she added.

The neutral key rate range

The first half of 2024 showed the need for a higher level of interest rates in the economy, including taking into account the higher estimate of the neutral rate. “We have adjusted it upward by 1.5 percentage points to 7.5-8.5%,” Nabiullina said.

Inflation

The inflation forecast for this year has been raised to 6.5-7%. “These figures take into account the high cumulative inflation in the first half of the year and suggest its significant slowdown in the second half of the year under the influence of tight monetary policy,” Nabiullina said.

According to her, the monthly inflation rate “will begin to fall as early as July” and as for sustainable inflation rates, the decline will be slower.

The Bank of Russia may be able to stop inflation and “even cause deflation with an unsustainable level of interest rates” But as a result, the economy will not return to sustainable balanced growth, but will experience “excessive cooling of demand due to excessive volatility in all parameters – interest rates, production, employment – and a strong subsequent downward deviation of inflation from the target, which will have negative consequences for economic development, she added.

Economy overheating

Russia’s GDP growth rate remained high in the first and second quarters, “while inflation accelerated,” which means that “the economy remains in a state of significant overheating,” Nabiullina said.

For the first time in 10 years, the country experienced cyclical overheating of the economy, “when a long period of high interest rates is needed to cool demand,” she noted. At the same time, in the first half of this year, the degree of overheating of the Russian economy “was the highest in the last 16 years.”

Nevertheless, the Central Bank does not see any risks to Russia’s financial stability.

Lending

The Bank of Russia reported a decline in demand for mortgages in July. The imbalance in the mortgage market will gradually disappear, but the market will continue to grow. “In our forecast, mortgages will grow at a rate of 7-12%,” Nabiullina said. The mortgage portfolio of Russian banks will grow “at a more moderate pace” and will not cause overheating.

The dynamics of retail lending may slow down significantly, “including due to the cooling of mortgages”. The pace of credit growth is expected to be balanced, and this “will allow us to bring inflation more quickly to our target of 4%,” she added.

Risks of secondary sanctions

At the same time, the risks of secondary sanctions have indeed increased, which is noticeable “in the difficult situation with payments,” Nabiullina said. This affects imports, but “companies are actively looking for ways to make payments.”

Earlier on Friday, the Bank of Russia raised the key rate for the first time since December 2023 – from 16% to 18% per annum, and will consider the further raising it at its next meetings. “Inflation has accelerated and is developing significantly above the Bank of Russia’s April forecast. Growth in domestic demand is still outstripping the capabilities to expand the supply of goods and services.,” the regulator said.

The Bank of Russia plans to hold the next meeting of the Board of Directors on September 13.