(Bloomberg) -- The Bank of Russia is poised to hike its key interest rate on Friday to the record level it imposed after President Vladimir Putin ordered the invasion of Ukraine, as policymakers struggle to contain rapid price growth.
The central bank will raise the benchmark at its upcoming meeting to 20%, economists surveyed by Bloomberg forecast. Only two out of 11 analysts projected the rate to remain at 19%, while some left the door open to the possibility for a bigger increase.
“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 expects the bank to raise the rate to 21% amid rising government spending, a planned utility tariff increase and a weakening ruble.
Inflation expectations, a key measure for monetary policymakers, continue to rise, reaching 13.4% in October from 12.5% in the previous month. While the central bank has pledged to move inflation closer to the target of 4% next year, it’s on course to miss that goal for the fifth year running as 2024 draws to a close.
The bank’s latest inflation forecast for this year of 6.5%-7% will be likely revised upward at Friday’s meeting. Governor Elvira Nabiullina is scheduled to hold a briefing at 3 p.m. local time.
Price growth accelerated in September to 0.5% in monthly terms from 0.2% in August, Federal Statistics Service data showed.
Annual inflation decreased to 8.63% from 9.05%, but Bank of Russia analysts warned that any additional slowdown will be limited due to higher-than-expected government outlays and tariff increases in the coming years.
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.
Monetary policy should offset upward pressure on inflation from increased government spending as well as from the suggested tariffs hike, an October central bank report said. There is a high probability that further tightening is required in order to return inflation to the target level, it said.
What Bloomberg Economics Says...
Rate hikes so far have failed to cool inflation in Russia. The Bank of Russia is likely to hike its policy rate to 20% at the Oct. 25 meeting, and will emphasize its willingness to push the rate even higher if needed to bring inflation back to the 4% target. While an escalation of the war in Ukraine or the burden of sanctions could push the policy rate toward 25%, we don’t think it will get that high. We estimate it’s more likely to peak at 21% late this year.
Alex Isakov, Russia economist
Both the budget plans and the introduction of tariffs in 2025 on their own would provide “sufficient grounds for a more significant hike” than the 1 percentage point increase in September, said Oleg Kuzmin, an economist at Renaissance Capital in Moscow. He forecast a rate increase to 20% as the base case, but said there was a “significant risk” policymakers could raise it to 21% in one go, and in either scenario rate hikes would likely continue in December.
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.
“The Bank of Russia appears to be the only part of the state that still cares about inflation, while for the government, priorities are clearly elsewhere,” Orlova said. “But if inflation remains stubbornly high, it is the central bank and its top officials who will be publicly blamed.”
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