In response to persistent inflationary pressures and a weakening rouble, the Central Bank of Russia has implemented its third consecutive interest rate hike, raising its key rate by 100 basis points to 13%. This move comes as the bank grapples with the challenges posed by a vulnerable currency and mounting inflation.
Just one month ago, in a bid to stabilize the rouble’s dramatic decline against the dollar, and under pressure from the Kremlin to adopt a more stringent monetary policy, the central bank had enacted an emergency rate hike, increasing rates by 350 basis points to 12%. This rapid succession of rate hikes underscores the gravity of the economic situation.
In its latest statement, the central bank provided hawkish guidance, indicating its readiness to consider additional rate increases at upcoming meetings. The bank cited “significant proinflationary risks,” which include domestic demand surpassing the capacity for output expansion and the depreciation of the rouble during the summer months.
The decision to raise rates aligns with the expectations of a Reuters poll and reflects the central bank’s commitment to tackling inflation. Annual inflation had already reached 5.33% as of September 11, surpassing the bank’s 4% target.
The central bank has been on a gradual path of rate adjustments, reversing a dramatic emergency hike to 20% implemented in February 2022 when Moscow dispatched troops to Ukraine, leading to sweeping sanctions from Western nations. Rates had been lowered to as low as 7.5% earlier this year. However, the rouble’s sharp depreciation, driven by inflation risks arising from a tight labor market, strong consumer demand, and Russia’s substantial budget deficit, has compelled the central bank to embark on this tightening cycle since late July.
In light of the evolving economic landscape, the central bank has revised its year-end inflation forecast to a range of 6.0-7.0%, up from the previous range of 5.0-6.5%. Capital Economics analysts expressed doubt that inflation would return to the bank’s 4% target by 2024 and anticipated further rate hikes.
Central Bank Governor Elvira Nabiullina will provide additional insights into the bank’s forecasts and policy in an upcoming media briefing. The next rate-setting meeting is scheduled for October 27, where the bank’s stance on monetary policy will be further elucidated.
As Russia grapples with economic challenges, including inflation and a vulnerable currency, the central bank’s decisive actions and commitment to addressing these issues will continue to shape the nation’s economic trajectory.
