Russian central bank surprises markets by holding key rate at 21%

Russia’s Central Bank on Friday unexpectedly left its key interest rates unchanged at 21%, citing improved monetary tightening that had created the conditions to tame high inflation.

“Monetary conditions tightened significantly more than expected from the October key rate decision,” the bank he saidnoting “autonomous” factors from its monetary policy.

“Given the significant increase in interest rates for loans and the cooling of credit activity, the obtained tightening of monetary conditions creates the necessary prerequisites to resume disinflation processes and return inflation to the target , despite the high current price growth and high domestic demand”. he added.

Markets had widely expected the central bank to raise interest rates by another 200 basis points on Friday, after taking such a step in October amid an ongoing effort to contain inflation fueled by the military costs of Moscow’s invasion of Ukraine and from Western sanctions against its raw material. exports.

The bank on Friday said it will assess the need for a key rate increase at its next meeting in February. Currently, it predicts that annual inflation will fall to 4% in 2026 and remain in this target in the future horizon.

Russia’s consumer price index is currently more than double – annual inflation has risen to 9.5% since December 16, the bank said on Friday, noting persistent pressures, particularly in the family and business sectors. The consumer price index reached 8.9% in November on an annual basis, from 8.5% in October. The increase was largely driven by rising food prices, with the cost of milk and dairy products rising this year.

The interest rate hold comes even after Russian President Vladimir Putin admitted during his annual Q&A session with Russian citizens on Thursday that the The nation’s inflation was problematic and that there was evidence of the economy overheating. However, he stressed that Russia could still achieve 3.9%-4% of economic growth this year.

“Of course, inflation is such an alarming signal. Yesterday, when I was preparing for today’s event, I spoke with the president of the Central Bank, Elvira. [Nabiullina] which told me it was already somewhere around 9.3%. But wages have grown by 9% in real terms, I want to emphasize this – in real terms minus inflation – and the disposable income of the population has also grown,” he said, according to comments reported by Interfax and translated by Google.

The International Monetary Fund predicts that Russia will grow by 3.6% this year, before slowing to 1.3% growth in 2025.

The “sharp slowdown”, the IMF said, was expected “as private consumption and investment slowed amid a tight contraction in the labor market and slower wage growth”.

“What we see now in the Russian economy, [is] that he faces the limitation of capacity”, Alfred Kammer, director of the European Department at the IMF, he said when the fund released its latest economic outlook in October.

“So we have a positive output gap, or you can put it differently – the Russian economy is overheating. What we expect for next year is just also the impact that going over your supply capacity, you can’t keep for a long time. see an impact on the movement to a more normal territory, and, of course, it is supported by a tight monetary policy from the Central Bank of Russia, “he said.

“A tight monetary policy, to reduce inflation, slows down aggregate demand, and in 2025 it will have these effects on GDP. That’s why we see the slowdown in 2025,” Kammer added.