Pedestrians walk past the headquarters of the Central Bank in Moscow, Russia, August 15, 2023. Portal/Shamil Zhumatov/File Photo Acquire LICENSE RIGHTS
- This content was produced in Russia, where law restricts reporting on Russian military operations in Ukraine
MOSCOW, Oct 27 (Portal) – The Bank of Russia on Friday raised interest rates by a larger-than-expected 200 basis points to 15%, a fourth straight hike in response to the weak ruble, stubborn inflation and household spending Loan costs increased.
The central bank has raised interest rates by 750 basis points since July, including an unscheduled emergency hike in August when the ruble fell above 100 against the dollar and the Kremlin called for tighter monetary policy.
“Current inflation pressures have increased significantly and have reached levels above the expectations of the Bank of Russia,” it said in a statement, noting that domestic demand exceeds the supply of goods and services and credit growth is high.
Gov. Elvira Nabiullina also said the budget was a key factor in Friday’s decision as Russia increases government spending and pours money into the defense sector to boost military production and carry out its so-called “special military operation” in Ukraine.
“The updated medium-term fiscal policy parameters assume that fiscal stimulus will decline more slowly than expected in the coming years,” the bank said.
It also acknowledged for the first time that it may fail to bring inflation back to its 4% target next year, forecasting an inflation rate of 4% to 4.5% in 2024.
The majority of analysts polled by Portal had expected a rise to 14%. The ruble jumped to a more than six-week high against the dollar following the decision.
FRONT LOAD TIGHTENING
The central bank’s tightening cycle began this summer as inflationary pressures from a tight labor market, strong consumer demand and a budget deficit were compounded by the falling ruble.
Russia had gradually reversed an emergency increase to 20% that it made in February 2022 after Moscow sent its troops to Ukraine, leading to widespread Western sanctions. It cut interest rates to as low as 7.5% at the beginning of the year.
The central bank said inflation would be between 7.0 and 7.5% in 2023. It had previously forecast inflation of 6.0 to 7.0% at the end of the year. The annual inflation rate was 6.38% as of October 16th.
The bank maintained its hawkish stance, saying that tight monetary policy conditions would be maintained for a long period of time, but withdrew its forecast that it would assess the need for further rate hikes. Nabiullina described the signal as neutral.
But the bank has set its key interest rate range for 2023 at 15-15.2%, suggesting rates could rise further, and Nabiullina said this may be necessary. In 2024 the rate is expected to be 12.5-14.5%.
“At the last meetings, we raised the key interest rate in concrete steps and will be ready to do so again if we do not see signs of a sustained slowdown in inflation and a cooling of inflation expectations,” Nabiullina said.
The next collective bargaining meeting is scheduled for December 15th.
“It looks like today’s rate hike pushed the tightening cycle forward in response to the fiscal announcements earlier this month,” said Liam Peach, senior emerging markets economist at Capital Economics.
Reporting by Elena Fabrichnaya in Moscow and Alexander Marrow in London; Edited by Gareth Jones, Mark Trevelyan and John Stonestreet
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