(Bloomberg) -- The Bank of Russia hiked its key interest rate to a record high, surpassing the level it imposed after President Vladimir Putin ordered the invasion of Ukraine, and signaled future tightening was possible as policymakers grapple with persistent inflation.
The central bank raised the benchmark by 200 basis points to 21% on Friday, double the move predicted by most economists surveyed by Bloomberg. Two out of 13 analysts had projected a hold. Price growth continues to run at more than twice the central bank’s 4% target.
“The balance of inflation risks is still significantly tilted to the upside,” policymakers said in a statement. “The Bank of Russia holds open the prospect of increasing the key rate at its upcoming meeting.”
The bank raised its projections for price growth in 2024 and 2025 and warned that “a return of inflation to the target will require a much higher medium-term key rate path than forecast in July.” The central bank now sees inflation returning to its goal in 2026 rather than 2025.
“This doesn’t mean that the key rate doesn’t work,” Governor Elvira Nabiullina said when asked about persistent inflation at a briefing following the central bank’s meeting. “Without it, inflation would have been even higher.”
The Bank of Russia said that the economy was still in a state of overheating, and that slowing economic growth was primarily caused by limited resources for expanding supply, which creates inflationary pressure. At the same time, domestic demand, boosted by lending, rising wages and increased budget spending, continues to outrun production capacity.
“The Bank of Russia needs to restore credibility as its mantra that inflation is going to drop to 4%-4.5% next year sounds like wishful thinking,” said Tatiana Orlova at Oxford Economics, who expected the bank to raise the rate to 21%.
Inflation expectations, a key measure for monetary policymakers, have continued to rise, reaching 13.4% in October from 12.5% in the previous month. While the central bank has pledged to steer inflation closer to the target next year, it’s on course to miss that goal for the fifth year running.
Price growth accelerated in September to 0.5% in monthly terms from 0.2% in August, Federal Statistics Service data showed.
Annual inflation also decreased last month to 8.63% from 9.05%, but Bank of Russia analysts earlier warned that any additional slowdown will be limited due to higher-than-expected government outlays and tariff increases in the coming years.
What Bloomberg Economics Says...
The Bank of Russia’s 200-basis-point hike to 21% is an attempt to stop the erosion of its domestic credibility, after a streak of misses on its inflation target that stretch back to 2020. Looking ahead, we estimate that the Bank of Russia may need to hike as high as 25% to achieve the same level of strict policy that helped cool inflation back in 2022. That’s unlikely to be required as the economy should cool faster than the central bank expects in the coming months.
- Alex Isakov, Russia economist
Nabiullina said that the long-term deviation of inflation from the bank’s target has sapped consumer and business trust in the goal, which has in turn made price growth harder to curtail. She also cited increased lending by banks, the government’s budget policies and the central bank’s own failure to precisely communicate its intentions.
The Finance Ministry looks headed toward 1.5 trillion rubles ($15.5 billion) in expenditure above the budget plan during the remainder of the year as it seeks to cover additional military needs as well as extra costs stemming from subsidized lending. The ministry has almost doubled its forecast fiscal deficit for this year from 0.9% of GDP initially.
The central bank more than doubled the key rate to 20% in an emergency meeting in the days after Putin sent troops across the border into Ukraine in February 2022. Policymakers quickly resumed easing before pausing for almost a year at 7.5% and then started tightening again in July 2023.
(Updates with comments from Nabiullina in the fifth, 11th paragraphs.)
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