The central bank of Russia has unexpectedly increased its benchmark rate by 200 basis points and suggested that a further hike could occur next month due to rising inflation expectations and increased fiscal spending contributing to proinflationary pressures.
Under the leadership of Governor Elvira Nabiullina, the board raised the key interest rate to an all-time high of 21.00 percent, up from 19.00 percent.
Since July 2023, the central bank has increased its key interest rate by a total of 1,350 basis points.
The board indicated that additional tightening of monetary policy is necessary to bring inflation back to target levels and to lower inflation expectations.
“The Bank of Russia keeps open the possibility of raising the key rate in the forthcoming meeting,” the statement from the bank read.
By the end of 2024, inflation is anticipated to be between 8.0 percent and 8.5 percent. For next year, annual inflation is expected to decrease to between 4.5 percent and 5.0 percent, and it should stabilize at around 4.0 percent in 2026 before maintaining the target beyond that.
The bank acknowledged a significant rise in inflation expectations, primarily driven by the current high inflation rate. Additionally, domestic demand is growing faster than the supply of goods and services can keep pace.
Furthermore, increased fiscal spending and the associated widening of the federal budget deficit in 2024 are contributing proinflationary factors, as noted by policymakers.
The recent increase illustrates that despite President Putin’s attempts to showcase Russia’s economy as resilient during this week’s BRICS summit, significant challenges posed by the ongoing war remain for policymakers, according to Nicholas Farr, an economist at Capital Economics.
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