Bank of Russia tilts hawkish, with rate hike more likely in 2023

Russia’s central bank kept interest rates unchanged but signalled it will consider hikes at its coming meetings should risks to inflation worsen.
Policymakers held their benchmark at 7.5%, in line with the forecasts of all economists surveyed by Bloomberg. But in a shift of tone, the central bank said in a statement accompanying the decision that higher borrowing costs could soon be in play.
“If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase,” it said. The central bank also improved forecasts for the economy this year and moved its average rate guidance for 2023 higher by half a percentage point.
Speaking to reporters after the decision in Moscow, Governor Elvira Nabiullina didn’t rule out the possibility of more monetary easing in 2023 but said a rate hike is more likely than a cut this year. The rouble traded little changed after the announcement on Friday.
“This year the probability of a rate increase exceeds the probability of its reduction,” Nabiullina said. “The rationale of changing the rate will be determined by how the situation develops.”
Official borrowing costs haven’t changed since the central bank paused its steep monetary easing cycle that more than reversed an emergency hike after the invasion of Ukraine almost a year ago. But it’s now having to navigate risks to the economy from sanctions while inflationary pressures rise with heavier spending on the war in Ukraine.
Cheaper money has helped Russia avoid a sharp recession despite sweeping international sanctions. Between April and September last year, it delivered 12.5 percentage points of cuts in six steps to bring rates below their pre-war level.
The central bank’s latest forecasts didn’t change the outlook for inflation but now see the possibility that the economy will grow this year. It also projected that domestic demand will improve so much that imports will reach $384bn in 2023, or $44bn more than it had expected earlier.
“Consumer demand remained subdued at the end of 2022, but, from the beginning of 2023, it has been showing signs of recovery amid improving consumer sentiment,” the central bank said. Conflicting economic priorities are emerging as the stranglehold of sanctions hurts government revenue and spending on the war puts a strain on public finances.
The central bank has been focusing on threats to inflation stemming from budget outlays, growth in nominal wages and labour shortages as a result of the Kremlin’s call-up of men to fight in Ukraine. Weekly price growth is nearing levels last seen more than half a year ago and inflation expectations for a year ahead, a key factor for policymakers, remain close to 12% despite dropping for three straight months.
President Vladimir Putin’s government is meanwhile pressuring the Bank of Russia to turn more upbeat about the outlook for the economy and even signal it’s ready to loosen monetary policy, Bloomberg News reported this week.