Russia Hikes Key Rate Unexpectedly By 100 Bps

The Bank of Russia lifted its benchmark rate by 100 basis points on Friday as inflationary pressures remained elevated and domestic demand expanded significantly.

The board of directors, led by Governor Elvira Nabiullina, raised the key rate to 19.00 percent from 18.00 percent. This was the second consecutive rate hike. The bank was expected to maintain status quo.

The central bank said it holds open the prospect of increasing the key rate at its upcoming meeting.

The board observed that inflationary pressures remained high and inflation is forecast to exceed the 6.5-7.0 percent range by the end of 2024.

Further, growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services.

The board viewed that further tightening of monetary policy is needed to resume the disinflation process, reduce inflation expectations and ensure the return to the target in 2025.

Inflation is projected to fall to 4.0-4.5 percent in 2025 and stay close to 4 percent further on.

Regarding economic growth, the bank said the slowdown in the economic growth was probably due to the increase in supply-side constraints and softening foreign demand rather than cooling of domestic demand.

Capital Economics’ economist Nicholas Farr said a slow fall in inflation will probably provide enough cover for policymakers to leave interest rates on hold from here, but the risks are clearly skewed towards further hikes.

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