Bank of Russia raises key interest rate to cool inflation

Bank of Russia raises key interest rate to cool inflation
Photo: Ludvig14

After more than two years of cutting interest rates, Russia started its return to a “neutral” rate, although few analysts expected this to happen now. The majority predicted that the country’s banking regulator would keep the key rate unchanged that time, but the Central Bank decided to increase it by 25 basis points.

Russia’s Central Bank unexpectedly lifted interest rates last week for the first time in more than two years citing risks from rising inflation and geopolitical threats, reports Financial Times. As a result, the country’s key rate increased from a record low of 4,25% to 4,5%. The regulator also left the door open for further rises in the coming months. According to Central Bank’s head Elvira Nabiullina, Russia is returning to a “neutral” rate of 5-6%, but “uncertainties” may stop it from reaching that target by the end of the year.

Speaking at a press conference on Friday, Nabiullina said that Russia’s relatively quick economic rebound after declining to follow many other countries in imposing a second coronavirus lockdown last autumn meant inflation was rising more than expected. The indicator reached 5,8% last week, which was the highest figure in more than four years. The Central Bank expects consumer prices to rise further this month and return to its 4% target only by the middle of 2022 instead of the end of this year.

“The economy is growing faster than we expected, and this growth is becoming more stable,” said Nabiullina attributing the growth to the recovery of both internal and external demand for consumer goods as well as exports of metals, chemicals and food. Even the hardest-hit Russian sector, services, has seen “a significant improvement in business activity” in the absence of the second lockdown, added the banker. According to the Central Bank, Russia’s GDP will grow by between 3% and 4% this year after falling by 3,1% in 2020.

At the end of 2020, Russia imposed price caps on a number of key foodstuffs, as prices for them skyrocketed. Photo: Brateevsky

“The [Central Bank’s] decision was justified by pointing to still robust inflation pressures and elevated inflation expectations against the background of green shoots of economic recovery,” commented Ivan Tchakarov, chief Russia and CIS economist at Citibank. “This would indeed be consistent with a speedier return to a neutral policy stance, thus justifying expectations that more rate hikes will ensue in the months to come.”

Earlier last week, two other big emerging markets, Brazil and Turkey, also increased their main interest rates in a bid to constrain inflation. At the end of 2020, Russia imposed price caps on a number of key foodstuffs, as prices for them skyrocketed aggravating a decline in living standards.

By Anna Litvina