Russia’s central bank made a significant move on Friday, increasing its key interest rate by a higher-than-expected 100 basis points to 8.5%. This decision comes as the country faces rising inflation pressure due to a combination of factors, including a weak rouble, a tight labor market, and robust consumer demand.
Russia Central Bank Raises Interest Rates
Notably, this is the first rate hike by the bank in over a year. In the wake of Russia’s military intervention in Ukraine, which prompted international sanctions, the central bank had gradually reversed an emergency hike that reached 20% in February of the previous year. Its most recent rate cut, to 7.5%, was made in September.
In a statement, Russia central bank expressed concerns over “pro-inflationary risks” in the medium-term horizon. Domestic demand has outpaced production expansion capabilities, partly due to limited labor resources, contributing to persistent inflationary pressure. The rouble’s depreciation this year has also intensified pro-inflationary risks.
To address these mounting concerns, the central bank raised its year-end inflation forecast to 5.0-6.5%, up from the previous 4.5-6.5%. It further indicated the possibility of future rate hikes in upcoming meetings.
The bank’s decision surprised experts polled by Reuters, as they had anticipated a 50-basis-point increase. However, some analysts had revised their predictions recently, expecting an even larger rate rise following data showing higher inflationary expectations and an acceleration in weekly consumer prices.
William Jackson, Chief Emerging Markets Economist at Capital Economics, noted that the substantial 100-basis-point rate hike reflects policymakers’ apprehension about inflation risks. While he expects monetary tightening to continue, Jackson predicts at least another 100 basis points of rate hikes before the year’s end.
Though annual inflation had previously fallen below the bank’s 4% target due to the base effect from last year’s peak inflation levels, it has now risen to 3.86%. Governor Elvira Nabiullina attributed the increased inflationary pressure to demand-driven factors, particularly in the domestic tourism market and automobile production sectors, where supply struggles to keep pace.
The rising demand has led to higher imports and a weaker rouble, as exports decline. Chief Economist at Alfa Bank, Natalia Orlova, suggested that the rate hike seems to be a response to the currency market situation, as other inflationary pressures were evident during the previous central bank meeting in June.
Nabiullina acknowledged the significant weakening of the rouble but emphasized that excess demand, coupled with a shortage of labor force and supply constraints, remains the primary driving force behind inflationary pressures.
Recent events, such as the failed armed mutiny by the Wagner mercenary group and attacks on Russian infrastructure blamed on Ukraine, have heightened pressure on the rouble and dampened risk appetite.
Central Bank Governor Elvira Nabiullina will provide further insights into the bank’s forecasts and policies during a media briefing at 1200 GMT.
The next rate-setting meeting is scheduled for Sept. 15.