Russia Central Bank Hints At Rate Hike Ahead

The Bank of Russia decided to keep its key interest rate unchanged for the third straight policy session on Friday, but suggested that the policy would be tightened in case of further budget deficit expansion, a fall in the currency exchange rate and the persistent labor shortage that trigger pro-inflation risks.

The Board of Directors of the Bank of Russia decided to retain the key interest rate at 7.50 percent, as widely expected.

“If pro-inflation risks intensify, the Bank of Russia will consider the necessity of key rate increase at its upcoming meetings,” the bank said in the statement.

“Short-term pro-inflation risks have increased again and still prevail over disinflationary risks,” the bank said.

Any further escalation of external trade and financial restriction would weaken foreign demand for Russian exports, which in turn weaken the currency exchange rate, posing significant pro-inflation risk.

Further, the bank noted that in case of further budget deficit expansion, pro-inflation risks will rise and tighter monetary policy may be required to return inflation to the target in 2024 and keep it close to 4 percent further on. In addition, the bank noted persistent pro-inflation risks from the labor market.

It is now hard to argue that interest rate hikes won’t be delivered, Capital Economics’ economist Liam Peach said. The economist penciled in a 50 basis point hike to 8.00 percent in the second quarter.

After Russia invaded Ukraine in February 2022, the central bank hiked its interest rate sharply to 20.00 percent from 9.50 percent. Thereafter, the bank lowered the rate by a cumulative 1250 basis points since April.

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