"Severe" scenario for CBR's global forecast becomes more realistic

The baseline scenario for the forecast factored into the Central Bank of Russia's (CBR) monetary policy guidelines still remains the most likely, but the pessimistic scenario has become more realistic recently, Central Bank chief Elvira Nabiullina said at a joint meeting of State Duma committees on Tuesday.

In the baseline scenario of the CBR's forecast, the global economy will avoid new serious shocks, leading central banks will raise rates to curb inflation and this will slow growth, but there will not be a major recession.

Russian GDP in this scenario will continue to contract after shrinking by 3-3.5% in 2022, but will already return to growth in the second half of 2023 and growth rates will stabilize at 1.5-2.5% in 2025. Inflation will continue to slow and be 5-7% by the end of next year.

In the second scenario, external conditions are similar to those in the baseline one, with the difference that it assumes more dynamic formation of new foreign economic ties, establishment of imports and exports by Russian companies and accelerated recovery of domestic demand. In this scenario, inflation will return to the target level at the end of 2023 and monetary policy can be looser than in the baseline scenario.

"The third scenario - we called it 'global crisis.' In this scenario the raising of interest rates by leading central banks is not sufficient to slow the growth of inflation in time, meaning inflation will grow, despite rate hikes. As a result, rates will be higher and less predictable for longer. This will put pressure on the growth of the global economy, increase debt servicing costs, reduce the value of assets, and risks to financial stability will grow," Nabiullina said, presenting the monetary policy guidelines for the next three years to lawmakers.

"Geopolitical tensions will increase in this scenario, there will be fragmentation, regionalization of the global economy. Sanctions against Russia will intensify. We're considering this scenario with the intensification of sanctions and this will become another factor in the deterioration of the situation in the global economy in turn. As a result we could see a crisis comparable in scale to 2008-2009," Nabiullina said.

For Russia, this will mean a drop in demand for its key exports, a deeper drop in GDP and higher inflation amid the weakening of the ruble.

"In this shock - although in our estimate unlikely - scenario, additional tightening of monetary policy will be needed compared to the baseline scenario in order to limit the outfall from these negative external factors for the Russian economy and prevent an inflationary spiral," Nabiullina said. In this scenario, inflation will only get back on target in 2025.

"We call the baseline scenario baseline because we believe it is far more probable than the alternative scenarios," however, "in recent months the situation and balance of risks for the global economy have shifted somewhat, if not in the direction of a full-scale global crisis, then a more severe scenario for the development of the situation," Nabiullina said.