Page 109 - RusRPTJan23

8.2 Central Bank policy rate
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 are becoming more volatile (but primarily reflecting supply-side factors), taking a pause is viewed as a stabilizing move, which may anchor inflationary expectations amid the ruble weakening and growing government expenditures.
In some way, October’s no change decision and a tightening of monetary conditions driven by the market have already resulted in flat inflationary expectations. According to the CBR, in December, inflationary expectations for the year ahead remained at c12% (12.2% in November).
It also reflects that inflation acceleration in December was driven by non‐monetary factors, i.e. tariff indexation, which is estimated to contribute additional 0.5 p.p. to the YE figure, and seasonal factors through elevated fruit and vegetable prices. Excluding these temporary drivers, consumer prices continued the disinflationary pattern in the first half of December.
“No change decision” reveals the CBR’s intent to contain inflationary risks. The CBR has highlighted economic uncertainty, price dynamics, a deterioration in the external trade conditions, and softer fiscal policy as the main contributors to its decision to keep the rate unchanged. In its statement, the regulator also stressed that current reduction in the labour force might increase companies’ costs – business’ inflationary expectations three-months-ahead have already posted c4% m/m growth – and might become one of the key sources of inflationary pressure in 2023.
According to the CBR, its future monetary actions will be determined by consumer price dynamics (should return to 4% y/y target in 2024) and the necessity to support Russia’s economic transformation. This guidance basically remains neutral and in line with the CBR’s October rhetoric.
BCS expects monetary easing to 6.5% by YE’23” “We believe that, despite growing M-T inflationary factors, the regulator is unlikely to be able to hike the key rate in 2023. Immediate inflationary impact of the ruble weakening will be
109 RUSSIA Country Report January 2023 www.intellinews.com