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A man walks past the Russian Central Bank headquarters in downtown Moscow on September 6, 2023.
Alexander Nemenov | AFP | Getty Images
Russia’s central bank raised its key interest rate by a higher than expected 200 basis points to 15% on Friday, hiking borrowing costs for the fourth meeting running in response to a weak rouble and stubborn inflation pressure.
The central bank has now raised rates by 750 basis points since July, including an unscheduled emergency hike in August as the rouble tumbled past 100 to the dollar and the Kremlin called for tighter monetary policy.
“Current inflationary pressures have significantly increased to a level above the Bank of Russia’s expectations,” the bank said in a statement, pointing to domestic demand outpacing the provision of goods and services, and high lending growth.
The bank also drew attention to increasing government spending as Russia pours fiscal resources into the defence sector and ramps up production of military supplies to prosecute what it calls its “special military operation” in Ukraine.
“The updated medium-term parameters of fiscal policy assume a slower than expected decline in fiscal stimulus in the years ahead,” the bank said. It also acknowledged for the first time that it may not succeed in returning inflation to its 4% target next year, forecasting year-end inflation for 2024 at 4-4.5%.
The majority of analysts polled by Reuters had expected a smaller hike to 14%. The rouble leapt to a more than six-week high against the dollar after the decision.
Front-loaded tightening
The central bank’s tightening cycle began this summer when inflationary pressure from a tight labour market, strong consumer demand and the government’s budget deficit was compounded by the falling rouble.
Russia had gradually reversed an emergency hike to 20% which it made in February 2022 after Moscow sent its troops into Ukraine, prompting sweeping Western sanctions.
It cut rates to as low as 7.5% earlier this year. The central bank said inflation would range from 7.0-7.5% in 2023. It had previously forecast year-end inflation at 6.0-7.0%. Annual inflation was running at 6.38% as of Oct. 16.
The bank maintained its hawkish stance, stating that tight monetary conditions would be maintained for a long period, but withdrew guidance that it would study the need for further hikes.
“It looks like today’s interest rate hike front-loaded the tightening cycle in response to the fiscal announcements earlier this month,” said Liam Peach, senior emerging markets economist at Capital Economics.
Central Bank Governor Elvira Nabiullina was due to give a media briefing at 1200 GMT on the bank’s forecasts and policy.
The next rate-setting meeting is scheduled for Dec. 15.
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