Page 10 - RusRPTJul21

2.2 Inflation pressures are not temporary
According to Elvira Nabiullina, inflationary pressures aren’t temporary, but longer-term challenges due to the composition of inflation and fact that inflation expectations are at 4-year highs. Finance Minister Anton Siluanov is confident that current inflation levels reflect “overheating” in the economy. Inflation, in his words, “leads to the depreciation of money, [and therefore] the depreciation of social benefits and salaries. Do we really want this? No.” The Central Bank is talking about returning to a neutral monetary policy and the Ministry of Finance is reiterating intentions to ease back on spending to rein in inflation.
Despite Nabiullina’s assertions that the Central Bank is committed to a neutral policy course, the policy response to the mortgage expansion suggests something a little more complicated. To simplify, the plan is to let real interest rates in the economy rise in response to higher inflation and expected key rate hikes and choke off demand. By the end of the year, mortgage rates should rise from about 7.3% in annual terms to 9-9.5%. We can infer that the 9-9.5% band is considered “neutral.” That doesn’t really address the problem: the initial mortgage subsidy program was put in place without any increase in home construction. Housing deficits are driving up prices now more than the stimulus. The “early adopters” with lots of savings in hand and a desire for more space who work from home made their moves last year for the most part. Those borrowing now are just trying to improve their quality of life that little bit they can manage. Debit card overdrafts are up 340% year-on-year, 34.4% of Russians owe banks 80% of their earnings, and Russians are spending about 12% of their earnings aggregated nationally to service debts. A “neutral” rates policy provides MinFin a buffer because of exaggerated fears of deficits and reining in the cost of servicing debts (that theoretically are inflating away anyway?) while
10 RUSSIA Country Report July 2021 www.intellinews.com