Russia’s central bank implemented a 100 basis points hike, raising its key interest rate to 16% on Friday. This marks the fifth consecutive increase as a response to persistent inflation, hinting that the cycle of tightening might be nearing its conclusion.
Since July, the bank has escalated rates by 850 basis points, including an emergency hike in August prompted by the Kremlin’s call for stricter monetary policies amid the rouble’s decline beyond 100 against the dollar. Currently hovering just over 90, the rouble has made a recovery since then.
Despite this, the bank emphasized substantial pro-inflationary risks in the medium term, cautioning that maintaining stability near the 4% inflation target would necessitate sustained high rates. It also highlighted the potential inflation risks associated with higher-than-expected government spending.
Governor Elvira Nabiullina stated that the 100-basis-point increase and a rate hold were the primary options seriously considered. While there were suggestions for a sharper hike, she indicated, “Based on our baseline scenario, we are approaching the end of the rate hike cycle, but much will depend on the situation.”
The central bank’s series of tightening measures commenced during the summer, propelled by inflationary pressure arising from a tight labour market, robust consumer demand, and the government’s budget deficit, compounded by the rouble’s depreciation.
Addressing the supply-side constraints, the bank highlighted labour market conditions as pivotal, noting significant shortages, particularly in manufacturing, affecting the Russian economy.
However, the bank forecasted economic growth exceeding 3% this year, surpassing earlier predictions, driven by domestic demand propelled by increased lending and wages.
The anticipated economic rebound provides a favourable backdrop for President Vladimir Putin’s upcoming reelection in March amid various economic challenges. While Moscow’s success in circumventing a Western oil price cap eases some challenges, sanctions, global economic slowdown, and Russia’s reliance on oil and gas revenues persist as external risks, according to Nabiullina.
Analysts are divided on the bank’s future steps. Liam Peach, senior economist at Capital Economics, predicts further tightening, foreseeing another hike to 17% next year. Conversely, Anatoliy Shal of JP Morgan anticipates this recent increase as the tightening cycle’s culmination, suggesting rates could drop to around 10% by the end of 2024.
After an emergency hike to 20% in February 2022 due to Moscow’s actions in Ukraine, the bank gradually reduced rates to as low as 7.5% earlier this year.
President Putin, acknowledging the likelihood of annual inflation nearing 8%, considerably beyond the central bank’s 4% target, recently expressed regret when a pensioner raised concerns about egg prices.
Reiterating its anticipation of year-end inflation at the upper end of the 7-7.5% range, the central bank highlighted persistently high inflation expectations, expressing concern.
Looking ahead, the bank forecasts year-end inflation of 4-4.5% next year, though Nabiullina conceded the higher risk of inflation surpassing targets compared to falling below.
The central bank is scheduled to convene for its first rate-setting meeting of the new year on Feb. 16, coinciding with an update of its forecasts.