MOSCOW, June 11 – PRIME. The Bank of Russia, following a meeting of the board of directors on Friday for the third time in a row, raised the key rate and again by 0.5 percentage points – up to 5.5% per annum, follows from the press release of the regulator. FULL STATEMENT OF THE BANK OF RUSSIA On June 11, 2021, the Board of Directors of the Bank of Russia decided to raise the key rate by 50 bp to 5.50% per annum. The Russian and global economies are recovering faster than previously expected. Inflation is growing above the forecast of the Bank of Russia. The contribution to inflation from the side of stable factors increases due to the faster expansion of demand compared to the possibilities of increasing output. In the short term, this influence is amplified by the rise in prices on world commodity markets. Taking into account high inflationary expectations, the balance of risks has significantly shifted towards pro-inflationary ones. Increased inflationary pressures amid the nearing recovery of the economy could lead to a more significant and prolonged inflation deviation upwards from the target. This creates the need for a further increase in the key rate at the next meetings. Decisions on the key rate will be made taking into account the actual and expected dynamics of inflation in relation to the target, the development of the economy over the forecast horizon, as well as the assessment of risks from internal and external conditions and the reaction of financial markets to them. Under the current monetary policy, annual inflation will return to the Bank of Russia’s target in the second half of 2022 and will remain close to 4% thereafter. Inflation dynamics. Inflation is growing above the forecast of the Bank of Russia. In May, the monthly seasonally adjusted growth rates of consumer prices accelerated significantly, while annual inflation increased to 6.0% (after 5.5% in April). As of June 7, the annual inflation rate rose to 6.15%. The indicators reflecting the most stable processes of price dynamics, according to the Bank of Russia estimates, also increased in May and are significantly above 4% in annual terms. This is a reflection of the fact that strong domestic demand growth is outstripping supply expansion opportunities across a wide range of industries. Against this background, it is easier for enterprises to transfer increased costs into prices. For several months, inflationary expectations of the population have been near their maximum values over the past 4 years. The price expectations of enterprises continue to grow, remaining above the local highs of 2019–2020. Professional analysts’ expectations for the medium term are anchored near 4%. Under the current monetary policy, annual inflation will return to the Bank of Russia’s target in the second half of 2022 and will remain close to 4% thereafter. Monetary conditions remain soft given heightened inflation expectations and actual inflation. In these conditions, lending continues to grow at a rate close to the highs of recent years. At the same time, yields on short-term OFZs increased, reflecting expectations of a faster increase in the key rate by the Bank of Russia. There has been a tendency towards an increase in deposit rates. The decisions of the Bank of Russia to raise the key rate and the increase in OFZ yields since the beginning of this year will cause further growth in lending and deposit rates. This will increase the attractiveness of bank deposits for the population, protect the purchasing power of savings and ensure balanced growth in lending. Economic activity is recovering faster than the Bank of Russia expected. Operational indicators show a steady growth in consumer and investment demand. According to the Bank of Russia estimates, consumer activity generally reached pre-pandemic levels. The active recovery of the sector of services to the population continues. Output in most sectors of the economy, according to the Bank of Russia estimates, exceeded pre-crisis levels. Labor demand is growing across a wide range of industries. At the same time, there is a deficit in some sectors. The Russian economy is also supported by external demand. Against the background of the gradual normalization of the epidemic situation in the world, the prospects for the recovery of the world economy are improving. This, in turn, reinforces the rise in prices on world commodity markets. Under these conditions, according to the Bank of Russia estimates, the Russian economy will return to the pre-crisis level in the second quarter of 2021. The medium-term trajectory of economic growth will be significantly influenced by factors from both internal and external conditions. The dynamics of domestic demand will be largely determined by the pace of further expansion of consumer and investment demand. Consumer demand will be supported by a further decline in the propensity of households to save, along with an increase in income and lending. The process of budgetary policy normalization, taking into account the announced additional social and infrastructural measures, will also have an impact on domestic demand. The dynamics of external demand will largely depend on the measures of budgetary support in individual developed countries, as well as the rate of vaccination in the world. Inflationary risks. The balance of risks has significantly shifted towards pro-inflationary ones. The effect of pro-inflationary factors can be exacerbated by heightened inflationary expectations and related spillovers. Inflationary pressures could come from a more significant than expected decline in households’ propensity to save, driven by a combination of low interest rates and rising prices. Further upward pressure on prices may continue to come from continuing difficulties in production and supply chains. Pro-inflationary risks are also created by the pricing environment of world commodity markets under the influence of factors from both the demand and the supply side. This can affect the internal prices of the respective products. At the same time, the further dynamics of food prices will largely depend on the prospects for the harvest of agricultural crops both within the country and abroad. Short-term pro-inflationary risks are also associated with increased volatility in global markets, including under the influence of various geopolitical events, which may affect exchange rate and inflationary expectations. In the context of a faster than previously expected recovery of the world economy and, accordingly, the exhaustion of the need for an unprecedented stimulating policy in developed economies, the earlier start of normalization of monetary policy by the central banks of these countries is possible. This may become an additional factor in the growth of volatility in the global financial markets. Disinflationary risks for the baseline scenario remain moderate. Opening borders as restrictive measures are lifted could restore consumption of foreign services, as well as ease supply-side constraints on the labor market through an influx of foreign labor. Further growth in economic activity may be slowed down, in particular, by low rates of vaccination and the spread of new strains of the virus, as well as the related tightening of restrictive measures. The mid-term dynamics of inflation is significantly influenced by the budgetary policy. In the baseline scenario, the Bank of Russia proceeds from the budgetary, tax, and customs-tariff policy laid down in the Guidelines for 2021 and for the planning period of 2022 and 2023, the path of normalization of the budgetary policy, which assumes a return to the parameters of the budget rule in 2022. The Bank of Russia will also take into account in its forecast decisions to invest the liquid part of the National Wealth Fund above the threshold level of 7% of GDP. The Bank of Russia raised the key rate Increased inflationary pressure in the context of the final economic recovery could lead to a more significant and prolonged deviation of inflation upwards from the target. This creates the need for a further increase in the key rate at the next meetings. Decisions on the key rate will be made taking into account the actual and expected dynamics of inflation in relation to the target, the development of the economy over the forecast horizon, as well as the assessment of risks from internal and external conditions and the reaction of financial markets to them. The next meeting of the Bank of Russia Board of Directors, at which the issue of the key rate level will be considered, is scheduled for July 23, 2021. The time of publication of the press release on the decision of the Board of Directors of the Bank of Russia and the mid-term forecast of the Bank of Russia is 13:30 Moscow time.