Excerpts from the Information Notice of Bank of Russia:
Inflation dynamics. Inflation slowdown is continuing. Annual consumer price growth rate declined to 4.3% in August (from 4.6% in July 2019). August results show that annual core inflation also declined to 4.3% vs 4.5% in July. According to the Bank of Russia estimates, most inflation indicators reflecting the most sustainable price movements are close to 4%.
Taking actual inflation dynamics into account, the Bank of Russia has lowered its end-of-year annual inflation forecast for 2019 from 4.2-4.7% to 4.0-4.5%. Moving on, according to the Bank of Russia’s forecast and taking into account the monetary policy stance, annual inflation will remain close to 4%.
Economic activity. The Russian economy’s growth rate is still coming in lower than the Bank of Russia’s expectations. This is driven by weakening external demand for Russian exports on the back of a global economic slowdown as well as by weak investment activity dynamics, including government investment expenditures. July saw continuing annual growth of industrial production; however, leading indicators for July and August point to a potential worsening of economic conditions in industry. Retail trade turnover growth is further declining YoY amid stagnating real disposable household incomes. The labour market creates no additional inflationary pressure. The fact that unemployment remains at historic lows is not driven by expanding labour demand but rather by a simultaneously contracting number of employees and the labour force.
Given the weak economic activity observed since the beginning of this year, the Bank of Russia has lowered its GDP growth rate forecast for 2019 from 1.0-1.5% to 0.8-1.3%. Growth rates of the Russian economy in 2020-2021 have also been reviewed downwards considering the expected slowdown in the global economy. Economic growth might accelerate to 2-3% by 2022 should the Government’s measures for overcoming structural constraints, including the implementation of national projects, be realised.
Inflation risks. Disinflationary and pro-inflationary risks are balanced till the end of the year. Disinflationary factors are primarily related to the weak dynamics of domestic and external demand. That said, growth in budget spending in 2019 H2 — early 2020 will potentially be more distributed over time, which lowers pro-inflationary risks posed by this factor. At the same time, should the global economic slowdown be more pronounced, including due to tightening international trade restrictions and on the back of other geopolitical factors, this might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations.
A number of internal conditions continue to pose pro-inflationary risks over a longer-term horizon. Significant risks are posed by elevated and unanchored inflation expectations. The mid-term inflation dynamics may also be affected by fiscal policy parameters, including decisions on the use of the liquid part of the National Wealth Fund in excess of the threshold level set at 7% of GDP.
The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements, prices of individual food products, and possible changes in consumer behaviour. These risks remain moderate.