Russian central bank holds rates at 16%, raises inflation forecast
The Bank of Russia had raised rates by 850 basis points in the second half of 2023, including an unscheduled emergency hike in August
Russia’s central bank held its key interest rate at 16 per cent for the third meeting running, but raised its inflation forecast for 2024, acknowledging for the first time that it may struggle to reach its 4 per cent target this year.
The decision was in line with a Reuters poll of economists, which had forecast that the persistence of inflation, fanned by strong consumer demand and widespread labour shortages, would prevent the central bank from easing borrowing costs more quickly.
The bank lifted its inflation forecast to 4.3-4.8 per cent from 4-4.5 per cent previously.
“Due to the remaining elevated domestic demand, which outstrips the capabilities to expand supply, inflation will return to the target somewhat more slowly than the Bank of Russia forecast in February,” the bank said in a statement.
The Bank of Russia had raised rates by 850 basis points in the second half of 2023, including an unscheduled emergency hike in August as the rouble tumbled past 100 to the dollar and the Kremlin called for tighter monetary policy.
Inflation, the bank’s main area of concern, stood at 7.4 per cent in 2023, compared with 11.9 per cent in 2022. Economists expect it to remain well above the central bank’s 4 per cent target this year.
The bank updated its macroeconomic forecasts, raising Russia’s economic growth prospects to 2.5-3.5 per cent from the previous range of 1-2 per cent. It increased its forecast for the average key rate range in 2024 to 15-16 per cent from 13.5-15.5 per cent. Governor Elvira Nabiullina was due to address the media at 1200 GMT. The bank’s next rate-setting meeting is scheduled for June 7.
Russia’s economy rebounded sharply last year from a slump in 2022, but the growth relies heavily on state-funded arms and ammunition production and masks other problems.
“Labour shortages come as the key constraint on the expansion of output of goods and services,” the bank said. “Concurrently, labour market tightness continues to increase.”
The bank’s improved GDP forecast mirrors that of the economy ministry, which now expects economic growth at 2.8 per cent this year, while envisaging a weaker rouble and shrinking current account surplus in the coming years. The ministry’s stress scenarios anticipate stalling growth and a diving rouble. The central bank raised its 2024 current account surplus forecast to $50 billion from $42 billion previously.
In the first half of 2023, the central bank had cut rates as low as 7.5 per cent, gradually reversing an emergency hike to 20 per cent implemented in February 2022 after Moscow sent its army into Ukraine, triggering sweeping Western sanctions.
The Russian rouble hovered near a one-month high of around 92 to the dollar on Friday, ahead of a rate-setting meeting by the central bank at which it is widely expected to leave borrowing costs unchanged for the third time in a row.
At 0653 GMT, the rouble was steady against the dollar at 91.96, earlier hitting 91.8975, its strongest since March 27.
All 26 analysts polled by Reuters this week expect the Bank of Russia to keep interest rates unchanged at 16 per cent, with the gradual slowdown of inflation preventing the central bank from easing borrowing costs more quickly.
The rouble had lost 0.1 per cent to trade at 98.75 versus the euro and shed 0.1 per cent against the yuan to 12.67.
Brent crude oil, a global benchmark for Russia’s main export, was up 0.5 per cent at $89.41 a barrel.
Meanwhile Russia’s dominant lender Sberbank reported an 11.3 per cent increase in first-quarter net profit to 397.4 billion roubles ($4.32 billion) and sharply raised its retail loan growth forecast for the year.
Sberbank made record profits of 1.5 trillion roubles in 2023, a more than five-fold increase on the previous year, as Russia’s banking sector recovered from the impact of financial sanctions over Russia’s actions in Ukraine.
The state-owned bank, which dominates Russia’s banking sector with around 110 million retail clients, this week announced plans to make a record annual dividend payment of more than $8 billion.
Sberbank is majority-owned by the state and those dividends make a sizeable contribution to Russia’s budget revenues, ultimately enabling the government to continue heavy spending, in particular on what it calls its “special military operation” in Ukraine.
“We are observing strong growth for the start of the year in retail clients’ funds (2.4 per cent), which forms a solid base for the development of the business in the future,” CEO German Gref said in a statement.
The bank raised its forecast for the Russian banking sector’s retail lending in 2024 to 9 per cent-11 per cent and said it expected its loans to grow faster than the market. It had previously estimated growth at 4-6 per cent.