Bank of Russia may hold key interest rate steady amid signs of economic slowdown

The Bank of Russia is expected to maintain its key interest rate at 18% during its upcoming meeting on Friday, as recent economic data suggests a potential slowdown in inflation and retail demand.

This move would follow a significant rate hike in July and reflects ongoing concerns about inflationary pressures and economic stability.

Inflation trends signal possible pause in monetary tightening

The central bank has been grappling with high inflation, which has proven difficult to control since last year. However, recent figures show a slight deceleration in annual inflation, which fell to 9.05% in August from 9.13% in July.

This decrease marks the first slowdown in inflation this year. Monthly price growth also declined to its lowest level since late 2022, according to data from the Federal Statistics Service and the Economy Ministry.

Despite these signs, inflation remains significantly above the Bank of Russia’s target of 4%.

This persistent inflationary pressure, combined with the impact of government spending on retail demand, could prompt further monetary tightening later in the year.

Analysts weigh potential for further rate hikes

Most economists surveyed by Bloomberg anticipate that the central bank will keep the key rate unchanged at 18% to assess the effects of the July rate hike.

Oleg Kuzmin, an economist at Renaissance Capital, suggests that a pause in rate hikes would allow the central bank to evaluate the impact of its previous increase.

He also notes that if inflation does not slow sufficiently, additional rate hikes may be necessary later in the year.

At its July meeting, the Bank of Russia raised the benchmark rate by 200 basis points for the first time this year, highlighting concerns about potential stagflation—a combination of high prices and low economic growth.

Since then, the central bank’s rhetoric has shifted towards addressing the overheating economy and observing disinflation trends.

Divergent views on future monetary policy

Despite expectations for the central bank to hold the rate steady, some analysts believe that a rate increase remains a possibility.

Deputy Governor Alexey Zabotkin has indicated that the bank could consider another rate hike if inflationary pressures persist.

His comments suggest that the central bank is still deliberating on the appropriate response to ongoing economic conditions.

Bloomberg Economics notes that the central bank faces a balancing act between controlling inflation and managing economic activity.

Recent data reveals a decline in business confidence and a slowdown in corporate output expectations, which could influence the central bank’s decision.

However, rising consumer and corporate expectations, a weaker ruble, and increasing corporate credit growth add complexity to the decision-making process.

Household and business expectations influence policy outlook

Household inflation expectations continue to rise, reaching 12.9% last month. Business expectations have also increased, and corporate lending remains robust.

These factors contribute to uncertainty about whether the current key rate has reached its peak or if further hikes are necessary.

The central bank has acknowledged that it will miss its inflation target for the fifth consecutive year. Its revised inflation estimate for this year stands at 6.5%-7%, while the Economy Ministry’s forecast is even higher at 7.3%.

Potential scenarios for upcoming rate decision

Dmitry Polevoy, investment director at Astra Asset Management, suggests that the central bank’s decision to maintain the rate at 18% could signal readiness for future increases.

He outlines three possible scenarios: maintaining the rate, raising it to 19%, or even 20%. The latter two options are considered less likely but remain part of the discussion.

As the Bank of Russia prepares for its decision, market participants will be closely monitoring the central bank’s stance on interest rates and its approach to managing inflation and economic growth.

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