Bored Businessmen Funnel Frustration Over Interest Rate Reduction: The Moscow Economic Forum ("MEF. Economics for People") posed a question in their Telegram channel: "If we make the temperature in a cryo-chamber one degree warmer, will the climate significantly change?" The question comes from dissatisfied members of the target inflation sect, who believe that inflation is still not tightly controlled. Even the financial market showed no gratitude, as stocks and bonds began to drop immediately following the Central Bank's decision.
Anticipated Interest Rate Drop: General Discontent Prevails
According to the Central Bank, demand remains excessive: "domestic demand still outstrips the potential expansion of goods and services," the institution stated. Yet, the Russian economy is gradually returning to a balanced growth trajectory. The Central Bank's press release, however, made no mention of production reduction, especially in sectors unaffected by the defense industry (more on that below). It's hard to discuss balanced growth when the factor of supply - production - is never even mentioned.
The Central Bank's press release raises quite ambiguous feelings. Based on previous meetings, the data available should have been sufficient to prevent a rate increase. Talk of a reduction, even such a minimal one, was unheard of.
Moreover, despite the interest rate reduction, the bank's overall tone remained relatively harsh. The statement directly states that the Central Bank will maintain the rigidity of monetary and credit conditions necessary for inflation to return to its 2026 target, and it doesn't rule out an increase at future meetings. It seems that the government and industrial representatives forced the Central Bank to lower the rate, but forgot to update the pre-prepared press release on Nevsky Prospekt – or didn't consider it necessary. The additional credibility to this theory is that this meeting was supposed to be merely formal: no serious decisions were planned to be made. The next meeting, on July 25, will be crucial, as they will update the short-term forecast.
In a recent report at the Entrepreneur's Day forum in Tyumen, the head of the Analysis and Prognostics macor-economic processes department, Deputy General Director of CMACKP Dmitry Belousov, listed systemic economic factors. Among them, he highlighted the inclusion of most non-oil and gas sectors in stagnation (if not in recession) and the slowdown in investment growth due to an excessively high real key interest rate. Interestingly enough, the Central Bank's press release also neglects to mention the dynamics of investments.
According to Dmitry Belousov, if we examine the dynamics of industrial production without sectors dominated by the oil and gas industry, we can speak of a transition to recession. The volume of civilian production decreased by 0.8% per month in the first quarter (with a decrease of 1.1% compared to the previous month in March; seasonality is accounted for). As a result, the level of production reached its lowest levels since April 2023.
It turns out that factors limiting the growth in the processing industries, according to CMACKP, are firstly economic uncertainty, secondly, a deficit of demand (!) in the domestic market, and only thirdly - a lack of labor. The fact that labor constraints have become less critical than demand constraints, according to CMACKP representative, directly contradicts the Bank of Russia's policy of fighting "excessive demand" through high interest rates. Interestingly, the Bank of Russia itself supports the claim that the percentage of enterprises facing labor shortages continues to decline.
The business sector might question the Central Bank's decision to reduce interest rates, given the persistent issue of excessive demand and the lack of acknowledgement in the press release regarding production in sectors outside the defense industry. The ambiguity in the Central Bank's press release could potentially impact the finance sector, as investment growth might be influenced by interest rates and the overall economic outlook.
