The Russian central bank surprised everyone with a decision to raise interest rates to 8.5%. This was the first rate hike in over a year, following the reversal of an emergency rate hike to 20% made in February the previous year, when Russia sent its armed forces into Ukraine, leading to sanctions from the West. The bank had previously lowered rates to 7.5% in September.
In a statement, the Russian central bank explained that there were significant pro-inflationary risks in the medium-term. The increase in domestic demand was outpacing the capacity to expand production, partly due to limited labor resources. The persistent inflationary pressure was further amplified by the depreciation of the rouble this year.
As a result of these concerns, the Russian central bank raised its year-end inflation forecast from just below 4% to 5.0-6.5%. They also hinted at the possibility of further interest rate hikes in the future.
The decision took analysts by surprise, as most of them had anticipated a smaller 50-basis-point hike. However, some had revised their forecasts to expect a larger increase based on recent inflation data showing rising inflationary expectations among households and an acceleration in consumer prices.
The Russian central bank’s governor, Elvira Nabiullina, attributed the increase in inflationary pressure primarily to high demand, especially in sectors like domestic tourism and automobile production, where supply struggles to keep up.
The weakening of the rouble was also a contributing factor, driven by increased imports and decreased exports. Experts saw the interest rate hike as a response to the situation on the currency market, as the other inflationary pressures had already been evident in the previous Russian central bank meeting.
The pressure on the rouble escalated after an unsuccessful armed mutiny by the Wagner mercenary group in late June, along with attacks on Russian infrastructure, which Moscow blamed on Ukraine, leading to reduced risk appetite.
The Russian central bank’s governor, Elvira Nabiullina, is expected to provide more insights into the bank’s forecasts and policies in a media briefing. The next interest rate-setting meeting is scheduled for September 15.
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