According to our estimates, annual inflation is expected to be higher than we forecast in April but lower than its current level. Due to the high base effect in the first half of this year annual inflation will return to the target only in the second half next year. Third. Monetary conditions remain accommodative. Interest rates on loans and deposits are low as compared to current and expected inflation. Our decisions to raise the key rate in March and April have not yet been fully reflected in banks’ interest rates. Banks’ lending and deposit rates are closely connected with yields on government bonds, OFZs. OFZs are risk-free ruble assets for banks and the pricing of all other ruble products of banks is pegged to them. OFZ yields with various maturities change together with the key rate, though to a different extent. The key rate impacts to the most extent the yields on short-term OFZs, with maturities of up to two-three years. These yields have increased significantly over the past two months. They will impact the cost of short-term loans and also deposit rates, which have already started rising. Meanwhile, yields on long-term OFZs are largely determined by long-term inflation expectations, the assessment of the macroeconomic policy stability, and external environment. The cost of long-term financing of investment projects as well as mortgage loan rates depend precisely on the yields on long-term OFZs.
This is associated both with borders closed for labour migrants and with the expansion of several industries’ need to hire more staff than before the pandemic. The annual growth of nominal wages remains within the range of recent years. Accommodative monetary policy was required to ensure a faster return of demand to its prepandemic level and to restore output. Once recovery is completed, supply cannot keep pace with further fast expansion in demand. Therefore, accommodative monetary policy would continue to step up inflation rather than expand output. This brings us directly to the second factor underlying our today’s decision. Inflation becomes a growing concern. In May, annual price growth rates reached 6%, considerably exceeding the target level. The current inflationary pressure has intensified. The average three-month (from March to May) seasonally adjusted price growth peaked up to a maximum since January 2016. Similar trends are observed for other indicators of price dynamics under our consideration. It does not seem correct to attribute this elevated price growth exclusively to the impact of transitory supply-side factors, in particular, global price movements. Let me remind you that this explanation was the main one when prices picked up in Q4 last year. At that moment, doubts indeed persisted as to the sustainable nature of demand recovery given the ongoing pandemic. Nonetheless, even then we aired fears that the rise in inflation expectations driven by these external shocks might transform one-off proinflationary factors into sustainable ones.