The Central Bank expectedly left the rate at 7.5%, in line with most forecasts, as a sharp rise in spending and labor shortages are among the biggest concerns to rising inflation. On Friday, the Bank of Russia extended its monetary policy pause to the longest streak in more than 7 years, becoming increasingly focused on inflation risks at a time of big government spending. The bank’s policymakers kept the key rate at 7.5%, where it has been since September, a decision that fell in line with the forecasts of most economists surveyed by Bloomberg.

The central bank issued a hawkish statement accompanying its decision, saying that it is “keeping open the prospect of raising the key rate at its next meetings” to ensure inflation stabilizes at around 4% next year and beyond. “The overall balance of inflation risks has shifted further upward,” the statement said.

Inflation is nearing the end of a continuous decline that began a year ago. This decline has pushed CPI somewhat below the central bank's target of 4%. But despite long-standing warnings of severe labor shortages and the threat to prices from rising budget spending, Nabiullina, the CBR’s head, can probably afford to wait, as inflation is just beginning to show signs of acceleration.

The official cost of borrowing has not changed since the central bank ended its cycle of sharp monetary policy easing.

However, the odds are high that the Bank of Russia will be increasingly pressured to raise its prime rate in the coming months. Higher rates will help reduce capital outflows, which are depressing the ruble and slowing credit growth. We expect the central bank to end its 10-month pause and raise the rate to 8% by the end of 2023.

Meanwhile, evidence is starting to emerge that inflation is picking up. Weekly price growth jumped from nearly zero to 0.2% in the 7 days ended June 5. This is particularly surprising, given the fact it’s summer agricultural production peak season. Inflation expectations for the year ahead, a key factor for policymakers, rose in May for the first time in three months.

Analysts at the Bank of Russia continue to warn of a possible “increase in price pressures”, pointing to factors ranging from faster wage growth to a rebound in consumer credit.

Also, the central bank said on Friday that economic activity is improving faster than expected, thanks largely to a “sharp rebound in domestic demand.” But it also warned of a slowdown in growth due to a labor shortage.

As the economic outlook becomes more optimistic, Nabiullina said a rate hike remains “more likely” when she spoke to reporters after a meeting in late April. But «…existing opportunities to expand production in the Russian economy are increasingly constrained by labor market conditions,» the report said. «Labor shortages are increasing in many sectors amid the effects of partial mobilization.»