Macroeconomic data released before the meeting of the Board of Directors of the Bank of Russia on June 19 suggests a further reduction in the key rate. Inflation expectations of the population were updated at the lowest level in almost a year, and business price forecasts also improved. At the same time, a decrease in inflation pressure is recorded against the background of growing risks of an economic slowdown. In these conditions, analysts almost unanimously expect the key rate to be reduced by another 0.5 percentage points – to 14% per annum.
Published On June 17, data added arguments in favor of continuing monetary easing (monetary policy). As the Bank of Russia reported, population inflation expectations for the next 12 months dropped to 12.4% in June from 13% a month earlier. This is the minimum value since the middle of last year. Inflation observed by the population decreased to 14.2% from 15.1% in May. Companies’ price expectations also dropped. Their forecast annual price growth rates for the next three months fell from 3.4% to 3% for the economy as a whole, from 6% to 5.6% in retail trade, and from 2.9% to 2.1% in consumer goods manufacturing.
An additional argument in favor of easing the monetary policy can be the Rosstat data on GDP production published on June 17. In the first quarter, according to the department’s first estimate, the economy contracted by 0.2% in annual terms, and the main contributors to this decline were construction (minus 9.7%), transportation and storage (minus 1.8%), and processing (minus 1.5%).
According to Egor Susin from Gazprombank, current inflation over the past three months is only about 3.3% in annual terms, compared to the 4.1% that the Bank of Russia included in its forecast. At the same time, the accumulated effect of strict monetary policy continues to manifest itself in domestic demand.
Data from SberIndex and the Central Bank’s Financial Flow Monitor, published last week, showed that the recovery in economic activity in the second quarter was largely driven by export industries, while domestic demand remained weak. According to the PSB, enterprises focused on investment demand and government spending continue to reduce cash flows, while segments associated with household consumption show only minimal growth (see “Kommersant” dated June 17).
Against this background, an almost complete consensus of analysts has formed that the June decision of the Central Bank on the rate will continue to be cautious.
According to the consensus forecast of analysts on the Telegram channel “Cold Calculation”, most experts from investment banks, management companies and research centers expect the key rate to be reduced by 0.5 percentage points – to 14%. The forecast that the rate will remain the same is also present, but is rather an exception.
Changes in the external background may also be an important factor when making a decision by the regulator. Until recently, one of the risks was considered a possible jump in oil prices in the event of an expansion of the conflict in the Middle East. However, by the Central Bank meeting the situation had changed: oil prices had noticeably decreased as a result of the peace agreements between the parties.
As a result, the Bank of Russia is approaching its meeting on June 19 in a situation where data simultaneously indicate a decrease in inflationary pressure and growing risks of an economic slowdown. If in the spring the main problem for the Central Bank was inflation risks, now the risks of excessive cooling of domestic demand and investment activity are becoming more and more noticeable. “The most unpleasant thing is the budget uncertainty and the increase in the deficit announced by the Ministry of Finance on the horizon until 2029. A greater fiscal stimulus means higher demand and, possibly, inflation,” notes Dmitry Polevoy from Astra UA.
