Page 172 - RusRPTAug24

The main pro-inflationary factor is high domestic demand, which continues to grow at a rate exceeding the current capabilities of the economy with high economic and credit activity, the Central Bank writes. In essence, we are talking about economic overheating, the symptoms and consequences of which we described in detail in this article.
The main reason for this overheating is high demand against the backdrop of rising wages, accelerated by persistently high military budget expenditures in conditions of a severe labour shortage. Due to the growing demand for labour, the supply of which is limited by “negative demographic trends,” enterprises are forced to compete for employees and wages are growing faster than labour productivity.
Returning inflation to the 4% target will require that monetary conditions (MCC) in the second half of the year be stricter than in the first half of the year and maintained at a high level for a long time, Central Bank analysts write. Since the end of December, the key rate has not changed and remained at 16% - but at the meeting on July 24, the regulator will move to an increase, Elvira Nabiullina promised in early July. She announced a “significant increase” in the rate - that is, by at least 1 percentage point. The market is discussing a rate increase of 2 points at once.
A notably longer period of tight monetary conditions in the economy will be required for inflation decline than was expected in April, according to files released by the Central Bank. "Overall inflation pressure is not demonstrating a stable decline so far. For making the process of inflation decline stable it is necessary to maintain tight monetary conditions during a longer period than was projected in April," the regulator said.
Consumer prices in Russia rose by 0.64% in June 2024 (by 0.74% in May), according to figures provided by the Central Bank. Monthly growth of prices seasonally adjusted in annual terms went down to 9.3% (10.7% in May), which is seriously higher than in January-April 2024. Annual inflation increased to 8.59% (8.3% in May) as the current growth of prices this June was higher than in the same month last year.
Renaissance Capital said in a note that the Bank of Russia noted that
inflation has accelerated at its meeting on July 26, and to return it to the target, additional monetary policy tightening is required, and not just a longer period of maintaining tight monetary conditions. The Bank of Russia forecasts the average key rate until the end of the year in the range of 18.0–19.4%. The lower limit assumes that the rate will remain unchanged, but the upper limit is reached with a 200 bp increase to 20% at the meeting on September 13.
The Bank of Russia has raised its key rate estimates by 4 percentage points in 2025 and 2026. This is also a tough signal, but we would not focus on specific values while we are in a policy tightening cycle – in a few months, the
172 RUSSIA Country Report August 2024 www.intellinews.com