Russia’s CB hikes interest rate to counter growing inf lation
Friday’s rate hike is the highest since Russia was hit in 2014 by a fall in oil prices and Western sanctions following Moscow’s annexation of Crimea
Russia’s central bank on Friday raised its interest rate by 100 basis points to 6.5 per cent -- its biggest increase since a 2014 currency crisis -- as the country batles soaring food prices.
The Russian economy was hard-hit by the coronavirus pandemic and the 2020 oil price crisis, and authorities are under pressure following a leap in prices for staple goods such as sugar, sunflower oil and eggs.
“Inflation is developing above the Bank of Russia’s forecast,” it said in a statement, adding that the increase in its key rate aimed to “constrain this risk” and return inflation to 4.0 per cent.
According to the bank’s estimates, the Russian economy reached its pre-pandemic level in the second quarter of 2021.
However, the “steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors,” the bank added.
As a result, “businesses find it easier to transfer higher costs to prices”.
Friday’s rate hike is the highest since Russia was hit in 2014 by a fall in oil prices and Western sanctions following Moscow’s annexation of Crimea.
That year the central bank abruptly raised its key rate to more than 17 per cent.
Ater months of historically low inflation, consumer prices began climbing in March 2020, driven by a drop in the ruble’s value.
The central bank started raising its historically low rate the same month.
In June, Russian annual inflation remained high at 6.5 per cent according to the state statistics agency, the highest level since 2016 and well above a bank forecast of 4.0 per cent.
The bank’s next monetary policy meeting is set for September 10.
The Russian Central Bank Governor Elvira Nabiullina said in online press conference ater the decision, “The decision is based on a significant review of macroeconomic forecasts... The notable policy step we have taken is needed in order to bring inflation in line with the target.”
she added, “Deposit and loan rates were not as quick to react to the policy rate adjustment as the OFZ bonds, today’s decision is aimed at speeding up this process.” “The neutral (policy rate) range remains at 5-6% given inflation close to 4%... It is premature to say whether this rate hike is going to be the last one in the policy tightening cycle.” “We considered the options of raising the rate by 50, 75, and 100 basis points.” “We currently see the policy rate in the 6-7% range next year which will produce inflation at 4.0-4.5%.”
She added, “Carry trade flows have slightly increased against the backdrop of the rate hike. This does not significantly affect the rouble exchange rate, in our view.” “Equipment purchases using the national wealth fund money may also affect rouble exchange rate, such influence needs to be further evaluated, it is beter to invest the fund’s money into projects that boost Russia’s economic potential.”
“The first signs of inflationary pressure weakening appeared in the first half of July but this is not yet sufficient to talk about sustainable inflation slowdown.” “We must not put up with elevated inflationary expectations so that they do not anchor on this high level.” “We expect that in annual terms the decrease in inflationary pressure will become visible in autumn.” “There are many reasons to analyse the inflation target, we will look at how the target is formulated, its level and whether it will be a point or a range. We will discuss this for a year with experts, academics, business representatives and the public.”
She added, “We are not changing our approach to bank regulation because of this ( change in national wealth fund asset structure), but our banking regulation already includes measures aimed at making rouble deposits and loans more atractive and foreign currency ones less atractive.”
Russia’s rouble pared early losses on Friday ater the central bank hiked interest rates by the most since 2014, while concerns over civil unrest saw the South African rand lagging its emerging market peers for the week.
The rouble traded near three-week highs against the dollar and the euro, ater the central bank raised rates by 100 basis points to 6.5%, and signalled more tightening was on the way to curb stubbornly high inflation.
The hike is the fourth this year, as inflation accelerated to near five year highs and with volatile oil markets also hurting the rouble.
“We believe that at least a 25 basis point hike is more or less guaranteed for the second half of this year and, given the expected CPI profile, it is likely to come sooner rather than later,” Dmitry Dolgin, Chief Economist, Russia, at ING wrote in a note, referring to consumer price inflation.
“Further hikes are less certain at this point, suggesting that our view on the key rate ceiling in the 6.5-7.0% range still stands.” Anticipation of the hike saw the rouble fare beter than most of its peers this week, with the currency set for a 0.3% gain.