Russia Central Bank Signals Rate Hikes Ahead

The Bank of Russia left its key interest rate unchanged again on Friday but the forward guidance turned hawkish in the face of rising inflationary pressures.

The Board of Directors of the Bank of Russia, led by Governor Elvira Nabiullina, decided to retain the key interest rate at 7.50 percent.

“In the context of gradually rising inflationary pressures, the Bank of Russia holds open the prospect of increasing the key rate at its next meetings to stabilize inflation close to 4 percent in 2024 and further on,” the bank said in a statement.

Over recent months, inflation has slowed to the central bank’s target of 4.0 percent.

However, the central bank observed that medium-term balance of inflation risks has tilted even more to the upside.

The board said pro-inflationary risks are related to geopolitical tensions affecting foreign trade terms. The board sees risks to inflation from exchange rate movements.

The rising complexity of production, supply chains and payments due to external restrictions could lead to higher import prices as well as severe supply-side constraints, the bank noted. Deterioration in the global economic growth outlook can also have notable short-term pro-inflationary effects.

In case of further expansion in fiscal support, pro-inflationary risks would rise and tighter monetary policy might be required to return inflation to the target next year and keep it close to the 4 percent further on.

With inflation risks likely to materialize in the second half of 2023, the bank is set to deliver a 50 basis point hike by the year-end, Capital Economics’ economist Liam Peach said. There is a growing risk that it will deliver further tightening next year too.

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