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Bank of Russia sharply increases key rate after long pause to 8.5%

Russia's Central Bank has sharply increased its key rate after a long pause - by 1 percentage point to 8.5% per annum, noting reinforced inflationary pressure in the economy, according to a statement released on Friday.

"On 21 July 2023, the Bank of Russia Board of Directors decided to increase the key rate by 100 basis points to 8.50% per annum. Current price growth rates, including a variety of underlying indicators, have exceeded 4% in annualized terms and are still on the rise. The increase in the domestic demand surpasses the capacity to expand production, including due to the limited availability of labor resources. This reinforces persistent inflationary pressure in the economy," the regulator said.

The Bank of Russia added that it holds open the prospect of further key rate increase at its next meetings to stabilize inflation close to 4% in 2024 and further on. The Central Bank's outlook on the average key rate has been upgraded to 7.9-8.3% from 7.3-8.2% for 2023, to 8.5-9.5% from 6.5-7.5% for 2024, and to 6.5-8.5% from 5-6% for 2025. In 2026, the key rate is projected at 5.5-6.5% per annum.

The regulator has also upgraded its GDP growth outlook for 2023 to 1.5-2.5%, whereas the outlook for 2025 has been slightly downgraded - from 1.5-2.5% to 1-2%. In 2026, Russia's economic growth will total 1.5-2.5%, the regulator said. Earlier the Bank of Russia projected GDP growth at 0.5-2% in 2023, at 0.5-2.5% in 2024, and 1.5-2.5% in 2025. "Taking into consideration new data on the changes in economic activity in the baseline scenario, the Bank of Russia forecasts that the GDP growth rate will be 1.5-2.5% in 2023, 0.5-2.5% in 2024, 1.0-2.0% in 2025, and 1.5-2.5% in 2026," the report said.

Meanwhile, Russia's economy has in general completed its recovery phase. "According to the Bank of Russia's estimate, the economy has in general completed its recovery phase. In the future, the economy's growth rates will gradually converge towards the rates that are consistent with a balanced growth path," the regulator said.

Annual inflation is expected to reach 5-6.5% in 2023 and return to 4% in 2024, according to the Bank of Russia. Proinflationary risks have increased significantly over the medium-term horizon, according to the statement. "Currently, the main proinflationary risk is an increasing deviation of the Russian economy from the balanced growth path," the Central Bank noted. As of July 17, annual rate of consumer price growth was up at 3.6% after 2.5% in May and 3.3% in June.

That said, unemployment has dropped to a new historical low, the regulator pointed out. "The labor force shortage is particularly evident in Russian regions experiencing an increased level of consumer and business activity. Concurrently, low geographic and cross-sectoral labor force mobility is an additional structural constraint," Bank of Russia said, adding that in the majority of economic sectors focusing on meeting domestic demand output has either reached or exceeded pre-crisis levels.

[Source: Tass, Moscow, 21Jul23]

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