Annual inflation in Russia is projected to reach between 18% and 23% by the end of 2022, according to the Central Bank’s report released on Wednesday, May 11 at 17:00. The document provides the framework of the forecast and its implications for the economy and policy.
The central bank notes that inflation is likely to rise in most months for the remainder of the year. By the close of 2022, the annual consumer price increase is expected to be in the 18–23% band. It is anticipated that inflation will slow in 2023 and 2024 as disinflationary factors take hold and monetary policy remains flexible.
Under the ongoing policy measures, the annual price increase is expected to fall to around 5–7% by the end of 2023 and to return to the 4% target in 2024. The regulator emphasizes that a 4% inflation rate remains the main objective of the Bank of Russia, despite significant changes in how policy is implemented.
The decision to raise the key rate to 20% on February 28 helped to temper the rapid inflation rise and shield the economy from financial stability risks.
Looking ahead, the bank argues that a flexible inflation-targeting framework will enable Russia to adapt the economy to new conditions and lay the groundwork for a gradual return of inflation to target levels.
Sanctions will continue
The Bank of Russia expects that sanctions and export restrictions on Russian goods, along with import controls and corporate decisions, will persist through the forecast horizon into 2024.
Uncertainty and export constraints are likely to affect global commodity markets and keep prices elevated, the report states.
Additionally, the regulator forecasts that main Russian exports will be discounted in price, limiting export earnings. Over time, commodity prices are expected to move toward equilibrium levels, with the long-run equilibrium price for Urals oil estimated around 55 dollars per barrel.
Restrictions on exports and imports, together with payment and logistics challenges, are projected to keep foreign trade volumes below historical norms.
The central bank also notes that Russia is likely to have largely adapted to sanctions by mid-2023, with new sales markets emerging and production localization underway.
At the same time, disruptions in core production processes could lead to a larger and more persistent gap between supply and demand.
General uncertainty and difficulties in marketing exports, along with the need to source imports for production, are expected to contribute to a noticeable decline in private investment.
Major difficulty
The anticipated drop in foreign trade and the potential for later export growth are expected to keep the export share below historical averages in the new balance. The regulator notes that emphasis will shift toward producing for the domestic market.
Officials characterize the 2022 crisis as one of the most significant challenges for the Russian economy since the 1990s. The measures taken by the government and the central bank are seen as supporting a structural shift toward a new equilibrium trend.
Lowering the key rate is viewed as a way to facilitate this structural rebalancing without creating inflationary risks. It is suggested that room exists to cut rates before year-end.
The forecast range for the average key rate is 12.5–14% this year, 9–11% next year, and 6–8% in 2024. The timing and scale of any rate moves will depend on incoming data, evolving conditions, and shifts in risk balance, according to the central bank governor.
Note that toward the end of April, the central bank reduced the key rate to 14% per annum.
Reserves are running low
As of May 1, 2022, Russia’s international reserves stood at 593.052 billion dollars, a decline of 2.2% from the beginning of April, according to the central bank’s statement.
Following the start of the military operation in Ukraine, Western nations imposed sanctions that froze Russian gold and foreign currency reserves. Transactions related to reserve management and dealings with any legal entity acting on behalf of the central bank were restricted.
Earlier statements from officials indicated that roughly 300 billion dollars in gold and foreign exchange reserves were frozen. Foreign secretary accounts have cited larger figures, with claims of substantial freezes affecting a majority of reserves.
International reserves, which include foreign exchange funds, special drawing rights, an IMF reserve position, and monetary gold, remain highly liquid assets held by the Bank of Russia and the Russian government.
Rising costs for Russian households
In this environment, consumer spending in Russia has shown signs of increases. A market survey tracked weekly expenditures for the period May 2 to May 8, rising by about 2.4% from the prior week. The measured weekly expenditure averaged 5,265 rubles. Year over year, spending grew by 5.6%. The average purchase value declined to 671 rubles, down 0.9% from the previous week. Compared with the twelve-month average, the weekly expenditure index sits about 2% higher.