The economic dynamics of the first quarter shows that the Russian economy is adapting to high interest rates, a phenomenon previously observed only during periods of high inflation, according to experts from the Central Bank, in the March issue of 'What Trends Say'. The drivers of growth remain domestic government and consumer demand. Budgetary and credit injections led to the overheating of the economy and inflation acceleration in the last third of 2023, prompting the Central Bank to radically tighten its monetary policy (→ Re: Russia: Recovery Bubble). However, despite the fact that the key rate has been above 10% for seven months and at a prohibitive 16% for three months, the economy shows no signs of adequately slowing down and remains awash with money.
On the one hand, the effects of fiscal stimulus (this year's budget expenditures are planned to be 16% higher than in 2023) are still in effect, and the Central Bank has no control over this. Moreover, consumer demand is also at too high a level. Here, a key role is played by military payments and a significant increase in wages, which due to tension in the labour market has 'spilled over' from the defence sector to other sectors (→ Re: Russia: Windfall Revenues). Experts at the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) call wage growth 'the main factor behind the expansion of consumer demand and economic growth in general'. They believe that its influence was somewhat slowed at the end of the year, but is now resuming.
However, this is not the only factor in 'consumer overheating'. Although lending since the end of last year has been growing at a slightly slower rate than in the summer and autumn of 2023, 'a steady trend to slow down and stabilise credit growth at a moderate level', necessary for inflation to move towards the target 4%, has not been observed, according to the Central Bank analysts. Consumer lending growth in January was comparable to December's, +1.1% compared to the previous month. Moreover, the growth of unsecured consumer loans even accelerated, growing from 0.8% to 1.3%. This is above the average level of the first half of 2023. Only mortgage lending cooled down significantly, not so much because of the general level of interest rates, but because of the tightening of conditions for concessional loans (→ Re: Russia: Stability and Instability Factor).
One of the reasons for this credit activity is high inflation expectations, which reduce the susceptibility of economic agents to the nominal level of interest rates, according to the Central Bank’s analysts. These expectations respond weakly to the efforts of the Central Bank: compared to the peaks in December 2023 (when expected inflation was 14.2%), they fell to 11.5% by March, but the downward trend is fading (this was only -0.4% from March to February), according to a survey by 'inFOM', commissioned by the Central Bank. The level of inflation expectations, consistent with inflation at 4%, is 8-9%. This is the same as they were in 2018-2019, notes the MMI Telegram channel. Citizen-observed (subjective) inflation also fell by 0.4% in February, down to 14.8%.
However, the main factor behind the ongoing credit boom is that against the backdrop of still high inflation expectations, interest rates on bank loans have increased slightly, despite the sharp rise in the key rate. According to the Central Bank, in July 2023, when the key rate was 8.5%, the weighted average interest rate on long-term loans was 12.33% and on short-term loans it was 19.04%. In December, when the key rate had already been raised to 16%, long-term loans were issued at an average rate of 13.62% and short-term loans at 21.03%. At the same time, deposit rates grew almost synchronously with the increase in the key rate: long-term deposits grew from 7.46% in July to 14.32% in December, while short-term deposits increased from 5.69 to 12.9%, respectively.
The generosity of banks can be explained by the fact that, in the first half of 2023, they lacked resources for active lending, but then, as the key rate increased, as well as the growth of salaries and incomes, customers began to more actively deposit funds. In December 2023, the volume of funds in accounts grew by more than 5.5 trillion rubles, while the credit portfolio grew by less than 1.4 trillion rubles. Such a large inflow of funds allows banks to restrain the growth of interest rates on loans, the analysts at the ACRA rating agency conclude. This is also confirmed by surveys for example, when answering the Levada Center’s question on where it is better to keep savings, in September 2023, 'bank account' was chosen by 34% of those surveyed, and in January 2024 by 40%. Thus, wage growth not only stimulates consumption in the segment where it occurs but also, through deposit growth, restrains the rise in consumer loan rates.
Finally, some support for lending is provided by preferential programmes that are subsidised from the budget. The main beneficiaries of support are mortgages and lending to small and medium-sized enterprises, but indirectly subsidising interest rates also affects other sectors: banks can afford to sacrifice margins for the sake of increasing their portfolios. Thus, budget funds continue to support consumer boom through various channels. According to the Levada Center, from August 2022 to August 2023, the consumer confidence index increased from 82 to 85 points, and from August (when the rate hike cycle began) to February 2024, it jumped to 96. Such growth could have been fuelled by the effect of deferred purchases in 2022-2023: the population did not immediately adapt to new, non-European brands, and their prices seemed too high at first.
In any case, consumer overheating is preventing inflation from falling. Although it is down from its peak in November (+1.1% per month), it has hardly decreased compared to December (0.68%). Nonetheless, according to the Central Bank's estimates, the cooling and decline in price growth is already observed in the production segment (producer prices), and it should reach consumption. But the growth of incomes and the availability of money are significantly slowing down this process. Central Bank analysts have repeatedly emphasised that, in the current circumstances, tight monetary policy will have to be adhered to 'for a long time'. The authors of the MMI Telegram channel write that in reality the regulator is facing a more difficult task, in that it must assess whether 16% is enough to bring inflation back to target, if the formal tightness of monetary policy does not stop the consumer boom. In fact, the economic policy of the Russian authorities is based on a two tap principle: while the Central Bank tightens its own policy tap, the government leaves its budget (military) tap open.