The sanctions not only from the U.S., but also from the EU, as well as a possible increase in competition in the Russian market from Chinese manufacturers make us cautious about the potential growth of the Belarusian economy. There are currently many uncertainties on potential further sanctions as well on the implementation and impact of the already known ones. To reflect the downside risks, we decided to trim our current growth forecasts for this year down to 0.5% growth in 2021, implying a slump of around -2% yoy in the second half of the year.
Meanwhile, the National Bank of Belarus (NBB) is still in the game and moderately hiked the (rather ineffective) key policy rate. Accelerated inflation let the NBB to raise the key rate from 7.75% to 8.5% for the first time in the last six years. However, despite the state-imposed price controls, after a slight decline in March, the inflation rate rose again in May, reaching 9.4% yoy. At the same time, authorities adjusted their forecast and expect inflation at the level of 7.2% by the end of 2021. In turn, we updated our forecast for CPI and expect even higher 11% yoy at end-2021. We also revised our key rate outlook and raised it to 10% eop for year-end 2021.
For our estimates, we relied on the assumptions that, on the one hand, the state will have to reduce support to the public sector; on the other hand we took the appreciation of the BYN during April-May and the foreign trade balance improvement into account. In addition, according to NBB, weak consumer and investment demand within the country will also somewhat limit inflation. We expect the peak of inflation in Q4 2021, followed by a downward trend. If inflation keeps its upward trend, NBB is likely to rise the key rate rather sooner than later.