Inflation in Russia is forecasted to reach 6.5% by the end of 2024, and the Central Bank is preparing to raise the key rate.

The inflation rate in Russia for the year 2024 is expected to reach 6.5%, according to the forecast presented in the newspaper "Izvestia." In April, the Central Bank forecasted inflation at the level of 4.3-4.8%, but at the beginning of July, it was announced that the estimates would be significantly revised. It is possible that the key rate will be raised to 17-18%. Experts believe that this will have a minor impact on price growth. Currently, inflation is being driven by an increase in government spending and structural changes in the economy. Details on how the reduction of preferential mortgage programs will affect the slowdown in price growth can be found in the article in "Izvestia."

What Inflation to Expect in Russia

All nine analysts and experts from the newspaper "Izvestia" agreed that inflation in Russia will exceed 5% by the end of 2024. Five of them believe it will even be higher than 6%. The most optimistic forecast was given by "Uralsib" - 5.6%. The average forecast is 6.5%.

In April, the Central Bank expected price growth at the level of 4.3-4.8% in 2024. At that time, the Bank of Russia assumed that annual inflation would return to the target level in 2025 and thereafter would stay around 4%. However, on July 4, the deputy head of the regulator, Alexey Zabotkin, stated that the price growth forecast would be significantly increased.

This makes the arguments for raising the key rate even more compelling compared to June, he added. The Central Bank's Board of Directors meeting this month will consider the possibility of raising the key rate to 17-18%. Since January, it has remained at 16%.

According to forecasts, the key rate is likely to stay at 18% until the end of the year, said Sergey Grishunin, managing director of the NRA rating agency. In the conditions of sanctions and restrictions in logistics and payments, the costs of enterprises are rising, which also affects the cost of goods and services, added Sergey Grishunin.

Critics of the Central Bank's tight monetary policy believe that it limits the economy's potential due to the increased cost of loans, noted Anton Sviridenko, executive director of the Growth Economy Institute named after Stolypin. However, the main goal of the Central Bank is to restrain citizen savings expenditures, according to the expert. Active consumption would contribute to increased imports, demand for currency, and accelerating inflation, he stated.

The main issue with using the key rate to combat price growth is that its effect is manifested only after several quarters, explained Natalia Milchakova, a leading analyst at Freedom Finance Global.

Factors that Can Accelerate Price Growth

Among the factors contributing to inflation are the active structural restructuring of Russia's economy and a significant increase in federal budget expenditures, said Alexei Devyatov, chief economist at Uralsib Bank. He also added that May freezes and the expected year-end corporate income tax increase will have an impact. From 2025, the rate will be 25%, which is the result of fiscal system changes adopted by the State Duma and the Federation Council on July 10.

If inflation stays above the 4% target, this puts the Central Bank in a situation where it is necessary to maintain a tight monetary policy, noted Denis Popov, chief analyst at PSB. He also agreed that short-term risks of inflation intensification may be associated with unfavorable weather conditions and an unsuccessful agricultural season. Other factors include import issues and further rapid expansion of domestic demand.

Analyst Polina Shchukina from "Цифра брокера" also believes that rising oil prices and instability in global markets could stimulate inflation. Meanwhile, Alexey Devyatov from "Uralsib" is confident that any further increase in the key rate will have a limited impact on price growth.

Factors that Can Slow Down Inflation

Reduction of preferential mortgages and tightening macroprudential measures, such as restrictions on unsecured lending to borrowers with high debt levels, will gradually reduce lending rates, which will positively affect inflation, said Sergey Grishunin from NRA. In July, the most popular program of preferential mortgages for new buildings with an interest rate of 8% was completed. It was introduced during the coronavirus pandemic as a crisis measure to support citizens and the construction industry. Over time, the program was extended several times with more stringent conditions. In July, the terms of the family program were also adjusted.

Reducing budget expenditures will help slow down inflation, said Anton Tabah, chief economist at the rating agency "Expert RA." Polina Shchukina from "Цифра брокера" added that the stability of the ruble exchange rate and moderate growth of the money supply will also have a positive impact.

There is a possibility that reaching the target inflation level of 4% will only be achieved by the beginning of 2026, according to Natalia Milchakova. She also suggests that the Central Bank should reconsider the inflation target upwards, for example, to 5% per year. Achieving such a result would be easier, and the welfare of citizens should not deteriorate.

According to Rosstat data, weekly inflation in Russia from July 2 to 8 was 0.27%, and since the beginning of the year, consumer prices have increased by 4.68%. As reported earlier, in the coming months, inflation will be curbed, including by the influx of domestic agricultural products into the market.