09 June 2024, Russia, Moscow: Kremlin Guard Headquarters (left) and the Foreign Ministry (centre, background) in the center of the capital. Photo: Ulf Moder/DPA (Photo by Ulf Moder/Image Alliance via Getty Images)
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Russia's central bank on Friday raised its key interest rate by 200 basis points to 21%, citing consumer price increases significantly above its expectations and warning of persistent high inflation risks in the medium term.
The key interest rate was raised by 100 basis points to 19% in September.
Friday's move exceeds the 100 basis point increase that analysts had expected and raises the institution's benchmark interest rate to its highest level since February 2003, according to Reuters. They were last near similar levels in February 2022, when Russian policymakers raised them to 20% to calm domestic markets within days of Moscow's invasion of neighboring Ukraine.
The bank took a tough tone regarding additional policy steps on Friday. In a press conference following the decision, Russian Central Bank Governor Elvira Nabiullina said the institution's board had considered boosting the benchmark interest rate above 21% and left the door open to the possibility of further hikes at the next meeting in December, according to Google-translated comments. Reported by Russian news agency TASS.
He noted that the seasonally adjusted annual inflation rate averaged 9.8% in September, up from 7.5% in August. It now expects printing to be in the 8.0-8.5% range by the end of 2024 – operating “well above” its July forecast of closer to 6.5-7.0%.
The bank said in a statement: “In the medium term, the balance of inflation risks remains significantly tilted towards the upward direction.” He added, “The main risks are related to the continued high inflation expectations and the upward deviation of the Russian economy from the balanced growth path, as well as the deterioration of foreign trade conditions.”
The bank expects annual inflation to decline to 4.5-5.0% in 2025 and to 4.0% in 2026.
The Russian economy has been constrained by low global prices for its major oil exports and Western sanctions, which have restricted trade, drained Moscow's coffers earmarked for the war in Ukraine and contributed to the devaluation of the ruble. The US dollar rose 0.36% against the ruble at 12:52 pm London time.
Russia's interest rate hike – which occurred at a time when the European Central Bank and the US Federal Reserve are embarking on steps to ease monetary policy – has raised concerns about the possibility of stifling economic growth in the country.
The International Monetary Fund expects inflation in Russia to average 7.9% this year, noting in its October World Economic Outlook report that the country's gross domestic product will fall from 3.6% this year to 1.3% in 2025. , “With private consumption and investment slowing amid reduced monetary policy tightening.” labor market and slow wage growth.”
