Monetary conditions must stay tight for now for faster transition to a neutral monetary policy - Central Bank of Russia analysts

MOSCOW. April 16 (Interfax) - Inflationary risks mean monetary conditions must remain tight for now to enable a faster transition to a neutral monetary policy in the future, analysts from the Central Bank's Research and Forecasting Department said in their latest Talking Trends bulletin.

"In current conditions, monetary conditions need to remain tight to achieve a sustained slowdown in inflation to the target level. Tighter monetary conditions today will allow for a faster transition to a neutral monetary policy in the future. Conversely, looser monetary conditions will mean it will take longer to ensure price stability and bring interest rates down to a level consistent with neutral monetary policy," they said.

Despite a significant decline in the impact of pro-inflationary factors that drove the January price surge in February and March, monthly price growth remained elevated, including in underlying components. "A resumption of the trend toward a sustained slowdown in inflation to 4% requires keeping monetary policy tight for an extended period," the analysts said.

For annual inflation to fall within the Bank of Russia's forecast range of 4.5%-5.5% by the end of 2026, the seasonally adjusted annual rate of inflation in the remaining months will have to slow to less than 3.8% month-on-month (adjusted for the October indexation of utility tariffs).

The effect of the one-off inflationary factors that caused prices to surge at the beginning of the year has largely worn off. The direct pass-through of the VAT increase to prices fell approximately 0.2 percentage points in February and March from 0.3-0.4 pp in January.

Supply side inflationary factors are the main reason for the continued elevated price growth. The conflict in the Middle East, if it becomes prolonged, could gradually fuel these factors through rising prices for imported and exported goods

Consumer demand began to recover in March, particularly in the automotive segment. The inflationary effect of demand-side factors could increase slightly compared to January-February levels, the analysts said.