Central Bank's First Deputy Chairman advocates for an elevated key interest rate.
Hear the Lowdown on Russia's Interest Rates
curious_person asks Aksakov about when the Bank of Russia might lower their rates, and he points to their mid-term forecasts. Tulyn clarifies that the neutral rate, which keeps inflation at 4%, is estimated to be 7-8%, with a targeted reach by 2027. He also mentions that, even during economic restructuring and military operations, authorities focus on maintaining financial discipline and controlling the money supply. Tulyn adds that the government's economic bloc, including the Ministry of Finance and Economic Development, share the Central Bank's view on keeping rates high [1].
During the meeting on April 25, the Board of Directors maintained the key rate at 21%. The central bank cautioned that inflationary pressure is still high, although it's decreasing gradually, and domestic demand overshadows supply expansion. Nabullina emphasized the necessity of further reducing inflation expectations for stable disinflation. She forecasts prices rising by 7-8% this year, 4% next year, and then stabilizing at the target [2].
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Despite the high inflationary pressures persisting, albeit at a decreasing rate, the Central Bank is concerned with returning inflation to the target of 4% by 2026 [1]. To achieve this, the Bank plans to maintain a tight monetary policy for an extended period until inflationary risks diminish sustainably [1]. Additionally, the Bank is cautious of global economic uncertainties and the risks of a sharper economic slowdown, fueled by falling oil prices and broader global slowdown risks [3].
According to the Bank of Russia's baseline forecast, the neutral inflation rate of 7-8% is expected to be reached in 2025 [1]. However, key rate reductions are anticipated to occur gradually in 2026, with the key rate expected to decline to 13.0–14.0% per annum that year [1]. Market analysts and experts suggest that rate cuts might begin in the second half of 2025, possibly as early as July, depending on observed inflation trends and economic data [2]. The Central Bank, however, retains the option to increase rates if inflationary risks arise, particularly from external factors such as a weaker ruble or lower oil prices [2].
In essence, the Bank of Russia is holding onto high interest rates to combat lingering inflation, driven mainly by strong domestic demand, and to manage inflation expectations amid global economic uncertainties. The target neutral inflation rate of 7-8% is projected to be hit in 2025, with gradual key rate reductions expected to begin primarily in 2026 [1][2][3].
References:[1] https://rbc.ru/business/analytics/12_04/2023/04/2672213.shtml[2] https://tass.ru/ekonomika/13762219[3] https://www.bankofRussia.ru/publications/analytics/inflation_risks/2821151/
The Bank of Russia's focus on maintaining financial discipline and controlling the money supply, as mentioned by Tulyn, extends to their business and finance sector, as they aim to combat lingering inflation and manage inflation expectations. In the near future, market analysts predict that gradual key rate reductions might begin in the second half of 2025, providing potential relief in the business community.
