The board of the Central Bank of Russia (CBR) resolved to keep the key interest rate unchanged at 7.5% at the first policy meeting of 2023 on February 10, amid reports that Kremlin is exerting pressure on the regulator for monetary stimulus to spur stagnant consumer demand.

The decision of the CBR is in line with consensus expectations. This marks the third consecutive meeting at which CBR has left the rate unchanged. The key interest rate has remained flat at 7.5% since October, after the CBR cut it six times after the emergency hike to 20% amid the launch of the full-scale military invasion of Ukraine in February 2022. 

RBC business daily reminds that in the earlier parallel setup of low visibility on key macro parameters and high uncertainty during the COVID-19 pandemic the regulator acted similarly, cutting the rate to 4.25% and holding it flat for eight months.

"The current rate of price growth is accelerating, while remaining moderate in terms of sustainable components. Inflation expectations of households and businesses have declined, but remain at elevated levels,” the CBR commented on the inflation.

As of February 6, it estimated that inflation stood at 11.8% year on year compared with 12.7% in mid-December 2022 and 11.9% for 2022 overall. 

While the government was reportedly alarmed by inflation slowing down due to stagnant demand at the end of 2022, the first data of 2023 revealed a record-high budget deficit due to massive spending for Russia’s full-scale military invasion of Ukraine. This could be speeding up inflation again.

bne IntelliNews suggested that the CBR is unlikely to cave in to reported Kremlin pressure to send dovish monetary signals to spur growth, let alone cut the key interest rate from the current 7.5%, unless the government gets it fiscal act together.

This was confirmed after the policy meeting as the regulator signalled that it was not the time yet to support demand through lower interest rates, commenting that the “dynamics of economic activity are better than the CBR’s October forecast” and that “although the population remains cautious in consumer behaviour, there are signs of recovery in consumer activity".

The analysts surveyed by RBC believe that the main pro-inflationary factors that could influence the CBR’s decision and lead to monetary tightening despite Kremlin’s demands are an increased budget deficit and the impact of the oil embargo on Russian crude. They do not rule out that the CBR will act decisively should the government not resolve the fiscal issues and hike the rate as early as March.

Moreover, the CBR changed the wording of its closely watched press-release and said that it "will assess the feasibility of raising the key rate at the next meetings" in case of increased pro-inflation risks. This is a hawkish signal for higher interest rates that it did not give in December 2022.

"If the budget deficit widens further, pro-inflationary risks will increase and tighter monetary policy may be required," the Central Bank stressed, warning that "on the medium-term horizon, the balance of risks is still skewed towards pro-inflationary risks", specifically referring to "strengthening external trade and financial restrictions" that could weaken demand for Russian export goods and help accelerate price growth through the ruble exchange rate. 

The CBR’s communications “were far more hawkish than expected as it talked about a further build-up of inflation risks and the possibility of hiking interest rates. We had flagged that the risks were skewed in this direction and at least a 50 basis points rate hike now looks likely in Q2,” Capital Economics commented.

The CBR also remains concerned about labour shortages as a result of the mobilisation of military reservists last September, the Capital Economic analysts believe.