Russia’s central bank increased its key interest rate by 200 basis points to 21% on Friday, citing consumer price increases significantly above its forecast and warning of ongoing high inflation risks in the medium term. The key rate had been raised by 100 basis points to 19% in September.
This move exceeded the 100 basis-point hike expected by analysts and brought the institution’s benchmark rate to its highest level since February 2003. The bank had last approached similar levels in February 2022 when it was raised to 20% to stabilize local markets shortly after Russia’s invasion of Ukraine.
The central bank adopted a hawkish stance on further policy steps during a briefing following the decision. Russian Central Bank Governor Elvira Nabiullina mentioned that the board of directors had considered raising the benchmark rate above 21% and left open the possibility of additional hikes at the next meeting in December.
The bank reported that annual seasonally adjusted inflation had reached an average of 9.8% in September, up from 7.5% in August. It now expects inflation to range between 8.0% and 8.5% by the end of 2024, significantly higher than the previous forecast of around 6.5-7.0% in July.
In a statement, the bank highlighted that inflation risks remain tilted to the upside in the medium term due to persistently high inflation expectations, deviations of the Russian economy from a balanced growth path, and deteriorating foreign trade conditions. The bank projects annual inflation to decrease to 4.5-5.0% in 2025 and 4.0% in 2026.
Russia’s economy has been impacted by low global prices for its key oil exports and Western sanctions, leading to trade restrictions that have drained Moscow’s resources for the conflict in Ukraine and contributed to ruble depreciation. The U.S. dollar strengthened by 0.36% against the ruble at 12:52 p.m. London time.
The interest rate hikes in Russia, occurring as the European Central Bank and the U.S. Federal Reserve ease monetary policy, have raised concerns about potential constraints on the nation’s economic growth. The International Monetary Fund projects Russia’s inflation to average 7.9% this year and anticipates a decline in GDP growth from 3.6% in 2021 to 1.3% in 2025, citing slowing private consumption and investment amid labor market loosening and reduced wage growth in its October World Economic Outlook.
