Bank of Russia raises key rate to 5% and publishes future trajectory
The Central Bank of Russia is shifting from soft to neutral monetary policy to curb inflation, which is fuelled by geopolitical tensions and a rapid economic recovery. In addition to a higher-than-expected hike at the last meeting, the regulator doesn’t rule out another significant increase in the future.
On 23 April, the Bank of Russia unexpectedly raised its key interest rate by 50 basis points to 5%, reports Bloomberg adding that the regulator signalled more tightening due to ruble volatility, which contributed to inflation risks. Speaking at a news briefing after the meeting, the bank’s Governor Elvira Nabiullina warned of multiple risks that “may make it necessary for a more serious, significant increase in the rate in the future”. She said that the regulator might consider an increase of another 50 basis points.
In addition, the Central Bank for the first time published a key rate trajectory, according to which the indicator will average at 4,8%-5,4% this year and rise to 5,3%-6,3% in 2022. The guidance implies that the room for further rates is “potentially quite large,” considers Chief Economist of ING Bank in Moscow Dmitry Dolgin. “The wording suggests that another couple of hikes this year are quite likely,” he said.
As for inflation, the bank raised its full-year estimate from 3,7%-4,2% to 4,7%-5,2%, as price growth continues to outpace its forecast. Since the Bank of Russia introduced a surprise 25 basis-point rate hike last month, the ruble has been hit by a series of geopolitical shocks. Besides, price growth has been supported by a faster-than-expected economic recovery from the pandemic.
The majority of economists surveyed by Bloomberg (28 of 41) expected a smaller cut, while 13 economists forecasted the move. The ruble climbed more than any other major emerging-market currency. “The Central Bank’s guidance is cautious on timing, but the tightening cycle has further to run. Another move could come as soon as the next meeting in June,” commented Scott Johnson from Bloomberg Economics.
“The important moment is that they raised the inflation forecast considerably,” believes Sofya Donets, an economist of Renaissance Capital. “We expect the key rate to be at 5,75% in September and remain at that level in 2022.” As of 19 April, annual inflation declined to 5,5% after accelerating for 11 straight months. This suggests that price growth has passed its peak, but economists expect easing to be slow. The outlook for the ruble, which feeds through to inflation with a lag, remains uncertain. New US sanctions on Russia’s sovereign debt imposed this month have resulted in limited bond outflows so far, but the Central Bank remains ready for more measures, said Nabiullina.