By Alexander Marrow
MOSCOW (Reuters) -Russia’s central bank held its key interest rate at 7.5% on Friday, but suggested that it may have to hike rates this year as a widening budget deficit, labour shortages and a weaker rouble pose inflationary risks.
Governor Elvira Nabiullina told a news conference that the pace of price growth in January was probably the highest since last April.
“According to our assessment, the balance of risks has shifted more towards pro-inflationary ones,” she said.
Last year, the bank gradually reversed an emergency rate hike to 20% made in late February following Russia’s decision to send tens of thousands of troops into Ukraine and the imposition of wide-ranging Western sanctions in response. It has now held rates steady at 7.5% since the last cut in September.
It kept its year-end inflation forecast at 5.0-7.0%, retaining hopes that it can return inflation to its 4% target in 2024. Annual inflation was running at 11.8% as of Feb. 6, it said.
“If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase at its upcoming meetings,” the bank said in a statement.
It said short-term inflation risks had increased again, including the possibility that external restrictions on the Russian economy’s potential prove stronger than previously thought.
The bank now sees its key rate in the 7.0%-9.0% range this year, up from 6.5%-8.5% in the previous forecast.
After an estimated GDP contraction of 2.5% last year as Western sanctions took their toll, Russia’s economic outlook for 2023 appears brighter, but labour shortages, falling energy revenues and the widening deficit all pose challenges.
“In case of a further budget deficit expansion, pro-inflation risks will rise and tighter monetary policy may be required,” the bank said.
It adjusted its 2023 GDP forecast to between growth of 1.0% and a contraction of 1.0%, from a 1.0%-4.0% decline previously. The International Monetary Fund expects the Russian economy to grow 0.3% this year.
“As for GDP dynamics, quarterly dynamics are already positive in the third and fourth quarters. If we talk about annual indicators, in our opinion, GDP will move into positive territory in the middle of the year,” Nabiullina said.
EYES ON OIL PRICE
The decision came in line with a Reuters poll of analysts, who expected both the more hawkish signal and the hold.
The central bank also lowered its assessment of the average Urals oil price for 2023 in light of embargoes on Russian crude and oil products, imposed by Western countries over Russia’s actions in Ukraine, to $55 per barrel from $70.10.
That has implications for Russia’s 2023 budget, which is currently based on the $70.10 price. In January, Russia recorded a budget deficit of almost $25 billion, as expenditures soared and revenues slumped.
Nabiullina said the bank would monitor the impact on oil prices of Russia’s decision on Friday to cut crude oil production by 500,000 barrels per day from March.
The next rate-setting meeting is scheduled for March 17.
(Reporting by Alexander Marrow; Editing by Mark Trevelyan and Gareth Jones)
