Real inflation is already two-digit: what’s next
On the eve of 17 December, analysts thought the key rate would rise to 8,5% again at a meeting of the Central Bank. Chairwoman of the Central Bank Elvira Nabiullina had noted as early as November that the key rate would have to grow again by the end of the year. It is necessary to tighten the monetary policy to control galloping inflation, which is getting out of control. In expectation of the key rate hike, banks raised deposit and loan rates. In his article, Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin writes that the price growth has lost touch with the regulator’s targets, the latter has to balance between the necessity of keeping prices and not destroying the beginnings of economic growth.
If inflation passed its peak, the rate will rise by 0,75%
The rate has already gradually risen by 3,25% since the beginning of the year, up from the record low of 4,25% in March to 7,5% in October. Moreover, the last increment was bigger than the market had expected. We saw the ruble get stronger, the stock market grew as a response to this decision. Earlier, a significant rise of the rate was in July when it climbed from 1% to 6,5%. As we see, the summer and autumn became a moment when the monetary policy was seriously tightened. From a purely economic perspective, it is the correct vector — the Central Bank should be thinking about macroeconomic stability, not the expansion of banks’ credit portfolios. Since real inflation is already two-digit despite the official statistics.
No analyst is expecting the rate to stay at the current level, the main question is how much it would rise. A 1% hike, to 8,5%, looked like a consensus. Annual inflation accelerated to 8,4%, moreover, in early December, the economic authorities claimed the previous outlooks didn’t become a reality and the price growth turned out bigger. The data on inflation, which will be published during the so-called week of silence (seven days to the meeting), will become a key factor to fix the rate hike. If inflation passed its peak, the rate will rise by 0,75%. If not, besides the 1% growth, there will be another surge in February 2022.
The press service of Ak Bars Bank noted: “Inflation in November reached the new peak of 8,4%. Obviously, the Central Bank will continue raising the key rate to achieve more stable control over inflation. By our estimates, the Central Bank will raise the rate by 100 pp to 8,5% in December. The growth of the key rate will lead to a further increase of credit and deposit rates, which will favour the population’s higher saving ratio and lower lending pace. Also, such a considerable rise of the rate as one of the main factors will back up the national currency rate. Therefore we won’t see big risks of the weakening ruble rate even amid the growth of geopolitical risks.”
Fight against recession is the main reason for galloping inflation
The situation with inflation in our economy remains strained — amid a high share of imports in food and non-food commodities, the global growth of prices for foods, the disruption of logistic chains and rise in transport expenses cannot help but influence consumer prices in the country.
The regulator notes that the decisions on the monetary policy influence the economy and inflation 3-6 quarters late. In fact, the changes that began in March must start yielding fruit soon. According to Nabiullina, the government must take inflation back to the target not to lose people’s trust. This indirectly proves that not everything is under control, there are problems. The Russian Federal Statistics Service says that annual inflation in early November was 8,07%, 8,14% down in October. Some experts assumed that it was the peak and the situation would stabilise later. But at the beginning of December, the number rose to 8,4%.
Judge yourself: when the Central Bank raised the rate by 1% in July (the biggest increase over the year), outlooks for annual inflations were corrected from 4,7-5,2% to 5,7-6,2%. In November, we were already above these forecasts, moreover, 2 points up. Also in July, the Central Bank thought that the return to 4-4,5% was possible only in 2022. This is simply impossible, even though inflation in the USA is over 5%. We enjoy the fruit of heavy rain of money thrown into markets to stimulate the pandemic-affected economy. The fight against recession is the main reason for galloping inflation around the world. And this is not only our problem.
The rate hike in the economy is bearing fruit: the growth of consumer lending is decelerating, savings on deposits are growing. But many experts doubt that the monetary policy alone can cope with inflation. Given the tone of the Central Bank’s statements this year, the price increase is conditioned mainly by stable factors — demand is outstripping supply. Earlier this year, the Central Bank considered that the rise in global prices for goods accelerated inflation, which was seen a temporary occurrence.
I would like to note that the population’s inflation expectations, according to the Central Bank’s survey, have increased from 13,6% to 14,8% in the last two months. In July, the Central Bank noted an improvement in food inflation and weakening of inflation pressure in June and July. The tone of the Central Bank’s comments then spoke about the limited potential of the rate rise. Autumn expectations and a further scheduled tightened monetary policy mean the Central Bank was in the early days to make favourable forecasts.
Generally speaking, given the current dynamics of price rise, one shouldn’t expect inflation to significantly decelerate till the end of the year — the price surge is far from the target of the Central Bank. Growing attractiveness of Russian assets is a plus, which will bring an influx of foreign capital to our financial markets, thus supporting the ruble. It isn’t ruled out that the ruble will be 69 rubles per dollar and 81 rubles per euro.
In conclusion, I would like to note that prices in Russia are growing constantly, all markets — from food to construction — are affected. The Central Bank has to balance: it is necessary to both keep the prices from growing and not to go too far here destroying the beginnings of economic growth. These processes have different vectors, they require accurate tuning. A balance between them hasn’t yet been found.
The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.