Central Bank of Russia

Inflation Concerns: Central Bank of Russia to Raise Interest Rate

In a decisive move to combat mounting inflationary pressures, the Central Bank of Russia announced on Friday that it was raising its key interest rate by 100 basis points to 13%. This is the third consecutive rate hike in response to a weakened rouble and persistent inflation concerns. The decision came after the bank had already increased rates by 350 basis points to 12% when the rouble fell below 100 to the dollar.


Governor Elvira Nabiullina, at a press conference following the rate hike announcement, emphasized that the decision was prompted by the emergence of inflation risks. She further stated that the bank would maintain interest rates at elevated levels until it had sufficient confidence in the sustainability of the inflation slowdown.


The central bank’s statement highlighted the “significant proinflationary risks” that had materialized, including domestic demand outpacing output capacity expansion and the depreciation of the rouble during the summer months.


A Reuters poll indicated that the central bank’s decision to raise rates was largely in line with market expectations. Governor Nabiullina, in response to a question during the press conference, revealed that the board of directors had indeed considered holding rates steady but ultimately decided on the rate increase. She emphasized that achieving the bank’s 4% inflation target by the end of 2024 would necessitate a more aggressive rate trajectory.


The financial markets responded positively to the news, with the rouble strengthening by 0.7% against the dollar, trading at 96.70 roubles to the dollar.


The central bank also adjusted its year-end inflation forecast, revising it from 5.0-6.5% to a range of 6.0-7.0%. As of September 11, annual inflation stood at 5.33%. Capital Economics Senior Emerging Markets Economist Liam Peach analyzed the situation, noting that the central bank’s commitment to fighting inflation would likely require additional rate hikes in the near future. Peach remarked, “With fiscal policy set to remain loose, the economy likely to continue overheating, and inflation pressures expected to build further, there will be more pressure on the central bank to tighten monetary policy.”


Additionally, the central bank revised its 2023 key rate range forecast from 7.9-8.3% to a higher range of 9.6-9.7%. The bank’s latest projections also indicated an increase in this year’s current account surplus from $26 billion to $45 billion.


The next rate-setting meeting of the Central Bank of Russia is scheduled for October 27, indicating that further adjustments to the interest rate may be on the horizon.


In summary, the decision  of the Central Bank of Russia to raise interest rates for the third consecutive meeting underscores its commitment to addressing inflationary risks arising from a weakened rouble and a tight labor market. While the rouble initially responded positively to the news, the effectiveness of the bank’s measures in achieving its 4% inflation target by 2024 remains uncertain. The central bank’s actions will be closely monitored as it navigates these challenging economic conditions.

Source: Reuters

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