Page 51 - Russia OUTLOOK 2023

The CBR’s decision to maintain the key rate flat at 7.5% on December 17
came as no surprise, with market participants unanimously expecting
this no change decision. We believe that taking a pause can be viewed as
an appropriate strategy, when the economy is entering a new spiral of
geopolitical risks (oil and refined oil embargo) and when the domestic
economic situation is even less certain: weak household demand is
accompanied by high government spending.

The decision was supported by flat inflationary expectations. Amid increased
uncertainty, when inflation indicators have become more volatile (but primarily
reflecting supply-side factors), taking a pause is viewed as a stabilising move,
which may anchor inflationary expectations amid the ruble weakening and
growing government expenditures.

The central bank expects to return to a neutral key rate, which the regulator
still sees at 5-6% in 2025, Chairwoman Elvira Nabiullina said on November 9.

“The key rate will be at a level that will gradually reduce inflation, this means it
will be a little higher than the neutral range for some time,” Nabiullina told at a
meeting of the State Duma lower house committees that considered the main
directions of a unified state monetary policy for 2023 and 2024-2025.

“We expect to return to a neutral rate in 2025,” she added.

The CBR governor said that the Russian banking system has withstood shocks
of this year well and retains the potential for lending and a margin of safety.

According to Nabiullina, lending is now growing at a good pace, especially
corporate lending demonstrating that structural transformation of the economy
is going on, enterprises use credit to adapt to new conditions, to replace
external debt. She also said that the central bank plans to use regulatory
incentives to allow banks to meet the increased credit needs of business.

The soft inflation dynamics at the end of 2022 are welcomed by the
central bank, but will not be enough to offset Nabuillina’s concerns about
inflation risks stemming from the mobilisation of reservists. In its “talking
trends” bulletin issued in December the central bank said that “the
disinflationary effect on the consumer market was short-lived” and that the loss
of labour supply will result in an “intensification of pro-inflation forces” further
ahead. Nabiullina is not known as the “most conservative central banker in the
world” for nothing.

“The sanctions are very powerful. We should not downplay their impact both
on the Russian and international economy. We cannot get isolated from their
impact,” she said.

She also said that the situation and the balance of risks in the world economy
have shifted to a more severe scenario in recent months, if not to a global
crisis.

51 Russia OUTLOOK 2022 www.intellinews.com