Home Business Russian c.bank says rates will need to stay high as it hikes to 13%

Russian c.bank says rates will need to stay high as it hikes to 13%

by Mark Mendoza

In response to a weak rouble and persistent inflationary pressures, the Russian central bank raised its key interest rate by 100 basis points to 13% on Friday. This marks the third consecutive meeting where rates were increased, with the bank signaling further rate hikes at upcoming meetings. The decision to raise rates was in line with market expectations, as a Reuters poll had predicted the move.

The central bank cited several reasons for the rate hike, including domestic demand growth outpacing output expansion capacity and the depreciation of the rouble during the summer months. The bank also noted that inflation risks remained significant, warranting the need for high interest rates for a “quite long time” until there is confidence in the sustainable nature of the inflation slowdown.

This move comes a month after the central bank hiked rates by 350 basis points to 12% in an emergency meeting, responding to the tumbling rouble and a call from the Kremlin for tighter monetary policy. The central bank had gradually reduced rates to as low as 7.5% earlier this year but was forced into a tightening cycle due to inflationary risks from a tight labour market, strong consumer demand, and a wide budget deficit.

In addition to the rate hike, the central bank adjusted its year-end forecast for inflation to 6.0-7.0% from 5.0-6.5%. The current annual inflation rate stands at 5.33%, exceeding the bank’s 4% target. The bank also upgraded its 2023 key rate range forecast to 9.6-9.7% from 7.9-8.3%. It maintained its economic growth forecast for 2023 at 1.5-2.5% but warned that the economy had completed its recovery phase and that supply-side constraints, particularly a tightening labour market, would limit further growth.

Capital Economics expressed doubts about the central bank’s ability to meet its 4% inflation target by 2024 and suggested that more rate hikes would be necessary. The research firm cited loose fiscal policy, continued overheating of the economy, and mounting inflation pressures as factors that would increase pressure on the central bank to tighten monetary policy further.

The next rate-setting meeting is scheduled for October 27th. As the central bank continues its efforts to combat inflation and stabilize the economy, there will be close attention paid to future rate decisions and their impact on Russia’s financial markets and economic outlook.

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