Russian macro: economic policy to change as inflation remains too high
Recent developments in Russia showed that m-o-m inflation has stabilized, but at a high level, so that y-o-y inflation increased and reached 6.5% in June, as monthly inflation varied between 0.67% and 0.78% in 1Q21 and between 0.58% and 0.74% in 2Q21. Inflation was expected to accelerate but not to these levels, and not for so long.
The massively increased budgetary spending at the very end of 2021 was one of the reasons for higher inflation in early 2021 but this effect should have been over by the end of 1Q21. M-o-m inflation, however, remained high, implying that other factors were prevailing. It looks as though Russia’s higher-than-expected inflation in 2021 originated mostly from economic policy, aggravated by the globally low interest rate environment and somewhat higher global inflation that Russia imported. All this led to an unlucky combination of rapidly growing domestic nominal wages and growing demand for expensive consumer credit, which caused domestic demand to overheat as foreign travel remains restricted amid the pandemic.
It is almost certain that the CBR will continue to raise rates in the short term. Even though the forthcoming rate hikes can be potentially negative for economic growth, the effect may be smoothed as it should reduce Minfin’s unnecessary borrowing on the domestic market, crowding out the rest of the borrowers while running the budget with a surplus.
* In November–December 2020 and in January 2021, m-o-m consumer lending grew by less than 1%. In February 2021 its growth accelerated and has remained above 2.0% since March.
* Nominal wage growth accelerated in 2021 as well. In April, for instance, the average nominal wage was up by 13.8% y-o-y and 3.1% m-o-m.
* Domestic demand also increased as Russians stopped saving money in 2021. Despite accelerated inflation, banks are keeping ruble deposit rates low, i. e., very negative in real terms. Even after the CBR began raising its key rate, banks were reluctant to raise deposit rates, encouraging Russians to invest either in foreign equities, in real estate, or to buy durable goods. In the latter case, this also contributed to the additional expansion of consumer demand.
* Consumer credit growth will start to decelerate in the comings months as, having failed to cool down the consumer credit market by hiking its key rate, the CBR decided to strengthen macro-prudential measures. These measures will have a stronger effect than the key rate hikes.
* The CBR hinted that it might further reconsider its policies at a later date. The regulator is set to publish its monetary policy review in 2H21, but so far has not hinted as to what kind of change may take place, apart from mentioning that the medium-term inflation target might be reconsidered. If so, then it can be only lowered, which would be positive for the economy.
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