(Bloomberg) -- The Bank of Russia may tap the brakes on monetary tightening aimed at cooling the country’s overheating economy after signs of a possible slowdown began to emerge.
Most economists surveyed by Bloomberg expect policymakers to hold the key interest rate at 18% when they meet on Friday as inflation, which the central bank has struggled to curb since last year, may have peaked. Retail demand, which has been boosted by massive government spending, also began to ease. Only three out of 13 analysts forecast the bank would raise the benchmark to 19%.
Annual inflation decelerated for the first time this year, although slightly, to 9.05% in August from 9.13% in July, while in monthly terms it reached the lowest level since late 2022, according to Federal Statistics Service data published Wednesday. The trend continued this month with weekly price growth also ticking down a little, the Economy Ministry reported late Wednesday.
Still, even some analysts who expect no action this time around from the Bank of Russia caution that monetary tightening may not be over, with price growth remaining far above the official target of 4%.
A pause would allow the central bank to assess the impact of its July hike, said Oleg Kuzmin, an economist at Renaissance Capital in Moscow. It may raise the rate again later this year if the slowdown in price growth is insufficient and inflationary risks from the budget remain.
At its July meeting, the Bank of Russia sharply raised borrowing costs for the first time this year, by 200 basis points, and promised to “consider the necessity of a further key rate increase.” Governor Elvira Nabiullina warned about the risk of stagflation, or high prices coupled with low economic growth, as the country’s war-driven economy seemed to be reaching the limit of its capacities.
Since then, rate-setters have softened their rhetoric, speaking instead of “a gradual reduction in the overheating economy” and a disinflation trend.
Domestic demand has moderated due to a slowdown in retail lending and household consumption, the central bank’s report said. That will spur companies to cut production plans, which may help reduce labor market tension, the report said.
To be sure, a rate increase is not off the table, according to Deputy Governor Alexey Zabotkin, who signaled at his last news conference ahead of the meeting that the bank could consider another hike. “So far, the data does not give any conclusive evidence that price growth is steadily slowing toward the target,” he said.
What Bloomberg Economics Says...
“The central bank will need to weigh higher inflation risks against concerns on cooling activity. The Bank of Russia’s indicator of business confidence fell in August, with broad weakness in corporate assessment of the current and expected output for the coming months. But despite signs of slower economic activity, there’s been an increase in consumer and corporate expectations, a weaker ruble and a pick up in corporate credit growth in recent weeks. Red-hot core inflation may nudge the Bank of Russia into hiking the policy rate to 20% from 18%.”
— Alex Isakov, Russia economist
Household inflation expectations, a key indicator for the bank, continue to increase, reaching 12.9% last month. Business expectations also rose, and corporate lending has not shown signs of cooling yet.
That casts uncertainty over whether the key rate has reached its peak level or not. It already stands close to where it was immediately after the initial shock of Russia’s February 2022 invasion of Ukraine and subsequent sweeping sanctions.
The central bank acknowledged it will miss its inflation target for the fifth year in a row, raising its inflation estimate for this year to 6.5%-7%. The Economy Ministry’s new forecast, discussed at a government meeting last week, is even worse at 7.3% this year.
Keeping the rate at 18% on Friday “will imply a clear signal” that the bank is ready to raise it to 19% or 20% in October, said Dmitry Polevoy, the investment director at Moscow-based Astra Asset Management.
The central bank could also “immediately raise the rate to 19%, which is an alternative option, or even 20%, which is an unlikely scenario,” he wrote in a note. “All three scenarios will be actively discussed.”
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