Translation. Region: Russian Federal
Source: Central Bank of Russia –
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Will housing become more affordable and what will happen to the key rate next?
The high key rate slowed inflation and the growth of housing prices, and strengthened the ruble. Now the Central Bank has begun to soften its policy so that the economy continues to grow. What will happen to the rate next, the director of the monetary policy department of the Bank of Russia Andrey Gangan told Rossiyskaya Gazeta.
— According to Rosstat, prices in Russia have been falling for four weeks in a row. Has the Central Bank already opened a box for congratulations on the victory over inflation?
— We trust Rosstat, but it is too early to congratulate. We need to achieve sustainability of the disinflationary trend. Over the last month, potatoes, beets and the rest of the "borscht set" along with cucumbers, which rose very much in the first half of the year, have been rapidly becoming cheaper. This is, rather, a normalization of prices. If you look at many other goods and especially services, the picture is not so positive. And consumers feel it. We look at data for months and quarters, not just for weeks.
— How does the Central Bank assess the current rate of inflation?
— According to our estimates, the current rate of price growth in July with seasonal adjustment is about 8.5% in annual terms, but this is the result of the recent indexation of utility tariffs. Without it, and if we remove the volatile prices of vegetables and fruits, the value will be about 3.5%, and for the "sliding" quarter, that is, on average over the last three months, about 4.5%.
In the baseline scenario, we expect inflation to be 6-7% overall this year and 4% in subsequent years. This forecast corresponds to an average key rate of 16.3-18% from August to December this year and 12-13% next year.
— What do these average figures mean?
— That the average rate will most likely be within these ranges. However, the specific value, say, at the end of the year, may be outside this interval. For example, if events develop favorably, that is, if inflation slows down rapidly, the rate may decrease further this year, and the forecast range takes this into account. The forecast does not exclude the possibility that we will have to keep the rate at the current level of 18% for a sustainable slowdown in inflation.
Next year, given the stabilization of inflation at 4% and balanced economic growth rates, the average rate of 12-13% allows for it to fall below this range by December 2026. A rate reduction to 7.5-8.5% is predicted for 2027. This will already be a neutral level, i.e. one that does not affect demand and inflation in one direction or another, since inflation is already at the target.
— Is the current key rate of 18%, three times higher than the current inflation, justified in this situation?
— To slow down excessive rates of price growth, it is not enough to simply raise the rate to the level of inflation, it is necessary to do it in a timely manner and with a reserve, otherwise it will not work. This “addition” is different for different countries. Where there is a long-term experience of low inflation and society is confident that inflation will return to the target, the economy reacts to the actions of the regulator more sensitively and quickly. Therefore, to reduce inflation in these countries, a smaller increase in the key rate and a smaller increase in the cost of borrowed money are required.
In the situation we are in, with all the risks, external and internal challenges, we need a tight monetary policy (MP) to combat excessive rates of price growth. This means that the key rate should be significantly higher than the current inflation rate, which is what we did in 2024-2025. It worked, now prices are slowing down, so we are gradually and proportionately reducing the key rate.
This approach allows people to protect their savings so that they do not depreciate, if, of course, they are placed on a bank deposit and, therefore, work in the economy. This is especially important for citizens with low fixed incomes, for example, for non-working pensioners who rely on their savings and pensions and cannot compensate for the rise in prices by switching to a job with a higher salary. By the way, thanks to the strict monetary policy, the ruble has also strengthened.
— When the dollar exchange rate last year went over 100 rubles and back at the same time as the key rate was raised, no one believed that a high rate would strengthen the exchange rate. How does it work?
— Through several channels at once.
Firstly, with high interest rates on loans, Russians have less demand for goods, including imported ones, and accordingly, the demand for currency decreases.
Secondly, ruble assets are becoming more attractive to citizens and businesses than foreign currency assets, so they prefer to save in rubles. In addition, if loans are expensive, then, say, exporters prefer to sell previously accumulated currency instead of borrowing in rubles to pay taxes and other expenses within the country. All this, on the one hand, reduces the demand for currency, on the other hand, increases its supply and contributes to the strengthening of the ruble. Therefore, in the first half of 2025, we saw a steady strengthening of the ruble. And it was primarily associated with a tight monetary policy.
As for the episode you mentioned, one-time factors played an important role in the short-term weakening of the ruble at the end of last year. Among the most significant were the latest sanctions in November, which temporarily reduced the inflow of currency into the country, and the peak of import purchases by car dealers. Then, before the next increase in the recycling fee, they bought more cars than usual, showing increased demand for currency.
— So, one-time factors may work against the ruble in the future?
— We cannot completely discount such a scenario, which is why it is so important to maintain low inflation and the attractiveness of ruble savings. If this condition is met, then during periods of turbulence there will not be too strong a surge in demand from consumers, and after some fluctuations the rate will return to stable dynamics.
— The Central Bank planned to publish a forecast for the ruble exchange rate, but then changed its mind. Will it or not?
— We have put this idea aside for now. We simply believe that its publication will be of little use in the current conditions. Most likely, many people will simply interpret the exchange rate forecast incorrectly. But it is possible that it will be published in the future. We will analyze this issue as part of the next review of the Central Bank's monetary policy.
— Will the possible lifting of sanctions strengthen or weaken the ruble?
— There is no clear answer here, much (though not everything) will depend on which sanctions can be lifted and in what order. For example, if there are fewer restrictions on exports for some time, but none on imports, then the supply of currency on the Russian market can grow and support the ruble. But this is only one scenario.
It is practically impossible to predict this channel of influence on the rate, because we do not know the future. But I can say with confidence that the stability of the rate depends on inflation – if it is fixed at the target, then the rate will not change sharply.
— They say that if the rate is reduced, people will withdraw money from deposits and these tens of trillions of rubles will “tear the economy apart.” Does the Central Bank see such a danger?
— The rate reduction and demand response is a controlled process. The Central Bank will set a rate that will not provoke excess demand with insufficient supply of goods and services, and therefore, price growth.
There are no risks of deposit outflow. The yield on deposits still exceeds not only inflation, but also the very high inflation expectations of citizens. The banking system operates stably, there is a deposit insurance system. The volume of bank deposits in recent months has not only not decreased, but even increased. People have rushed to fix the yield on term deposits. In the foreseeable future, we expect a slowdown in deposit growth, but not an outflow of funds from deposits.
Inflation expectations play an important role here. In general, expectations are a key element in the economy. After all, how do people understand whether a loan is expensive or cheap, whether a deposit is attractive or not? They compare the rate with their expectations of future price growth. That is why we pay such close attention to inflation expectations.
Expectations are understandably high now, because we have experienced several years of high inflation. The faster the Bank of Russia slows down price growth to 4% per year and fixes it at this level for a long time, the lower people's inflation expectations will be and the calmer and more rational their consumer and savings behavior will be. This is what the Central Bank's policy is aimed at.
— Is it correct in this case to talk about the easing of the Central Bank's policy? It still looks tough.
— The policy remains tight, but it is being gradually softened, proportionate to the slowdown in price growth. We lowered the rate by 1% in June and by another 2% in July, and the market began to react even earlier. Rates are falling in all segments, including bond yields, credit and deposit rates. It is important for us to avoid both excessive softness and excessive rigidity. The degree of rigidity should be such that inflation steadily declines to 4% in 2026.
— Will the growing budget deficit hinder the Central Bank’s plans?
— In the first half of the year, the dynamics of expenditures and the budget deficit as a whole were higher than normal seasonality would suggest. But we assume that in the second half of the year, the pace of federal budget expenditures will slow down. That is, expenditures will be carried out more evenly throughout the year than in the previous few years. In this case, the expected disinflationary effect of the budget will be preserved this year.
If there are significant changes in budget parameters in the fall, the Bank of Russia will react, including being ready to revise the key rate trajectory. But it is premature to talk about this. First, let's see what happens.
— Are you worried about the decline in oil and gas revenues?
— The Ministry of Finance took into account the lower oil price when it revised its forecasts in the spring. Now the budget includes a conservative price of $56 per barrel. The lost oil and gas revenues are compensated from the National Welfare Fund according to the budget rule, which is neutral for inflation. There are no risks here that we or the Ministry of Finance would not take into account.
— Does the Central Bank support revising the cutoff price under the budget rule from $60 per barrel downwards?
— We believe that the time has come to discuss this topic. The supply of oil on the world market is gradually increasing, while demand is quite restrained, plus the story with US tariffs adds uncertainty. In the medium term, the risks for oil prices are shifted downwards. But it is, of course, up to the government to decide this issue.
— And what impact did the increase in housing and communal services tariffs have on the Central Bank’s policy?
— This is a one-time inflationary factor, but it was also taken into account in advance in our forecast. In the data for July, we saw a temporary acceleration of the current rate of price growth — mainly due to the planned indexation of tariffs for housing and communal services. However, this should not disrupt the overall disinflationary trajectory.
In this sense, it will be more important for us to assess the reaction of inflation expectations to this temporary acceleration of price growth. Utilities are a significant part of our expenses and affect almost every family. If inflation expectations among the population and business increase because of this, then this will, of course, narrow the space for reducing the key rate.
— People are concerned about housing affordability. When the key rate rises, mortgages become more expensive, and when it falls, the apartments themselves become more expensive. Is the market trapped?
— Demand and price dynamics in the housing market have recently been determined not only and not so much by the key rate, but by the scale of preferential programs. Apartments have become much more expensive precisely after the launch of mass preferential mortgages. During the pandemic, the benefits were supposed to support the sagging demand, but since 2021, the mass non-targeted program has led to excess demand, price acceleration and reduced affordability of housing. That is why we insisted on its completion, so that state assistance in purchasing housing would be exclusively targeted.
High housing prices are another reason why we need low inflation. It will also be reflected in the prices of building materials manufacturers and builders. And if people's income increases faster than real estate prices, housing will become more affordable. In addition, as inflation and the key rate decrease, the terms of market mortgages will also improve. When inflation was close to our target of 4% in 2017-2019, mortgage rates without any preferential programs were 8-9%, but there was no rush among apartment buyers, and housing prices grew moderately.
— But there will be no rapid growth in wages without economic growth, and business is talking about a decline and even a recession.
— Certain industries are really facing difficulties now, and based on a limited sample it may seem that there is no growth. We are very attentive to business sentiment, every month we survey about 15 thousand enterprises across the country. Based on this data, the Bank of Russia calculates the business climate indicator. Many industries feel fine, in July this index remained in the positive zone.
Overall, the economy will continue to grow this year and next. Preliminary data on GDP growth for the first quarter of 2025 is plus 1.4%, and for the second quarter – plus 1.1%, with a forecast of 1-2% for the year as a whole. The situation is developing within our expectations, although the spring forecast of the Ministry of Economic Development was slightly higher – plus 2.5%.
This is a transition to balanced growth rates after overheating in the previous two years. Let me remind you that in 2023-2024, the Russian economy grew at a rate of over 4%. This is a very high result – faster than the entire world economy grew.
Today, our economy has used almost all of its available production capacities, logistics and infrastructure, and most importantly, almost all of its human resources – it is difficult to find new workers now. We need a break and new approaches to increasing labor productivity. Without this, all of the growth in wages will inevitably be “eaten up” by inflation, and working people will ultimately gain nothing.
Contrary to popular belief, I will say: it is very important for the Central Bank that people's standard of living improves. And therefore we will do everything possible to ensure that inflation is stably low and does not devalue income growth.
— We live in turbulent times, when conditions are constantly changing. What will the Central Bank do if everything goes wrong again? Is it possible to completely exclude the risk of a new increase in the key rate?
— Our baseline forecast does not include an increase in the key rate, but if events develop differently, this cannot be ruled out. Therefore, in addition to the baseline, we are also considering alternative scenarios. This is necessary in order to be ready to act in any conditions. Although the baseline scenario is the most likely, so we mainly discuss it.
If events develop in accordance with the baseline scenario, then there is, of course, still room to reduce the rate in 2025. But the rate reduction is not a foregone conclusion. There may be different steps, including pauses between reductions. Pro-inflationary risks remain, including from geopolitics, and we will make further decisions cautiously, based on incoming information.
Sergey Bolotov, Russian newspaper
Please note: This information is raw content obtained directly from the source of the information. It is an accurate report of what the source claims and does not necessarily reflect the position of MIL-OSI or its clients.
