MOSCOW, Russia: Russia's central bank cut its key interest rate by 300 basis points for the third time since an emergency hike in late February, citing cooling inflation and a recovery in the ruble.
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Russia's central bank on Friday unexpectedly left key interest rates unchanged at 21%, citing increased monetary tightness that has created conditions to tamp down sky-high inflation.
“Monetary conditions have tightened more than anticipated in the October key interest rate decision,” the bank said he saidpaying attention to factors “autonomous” from its monetary policy.
“Taking into account the noticeable increase in interest rates for borrowers and the cooling of lending, the tightening of monetary conditions achieved creates the necessary conditions for the resumption of disinflation processes and the return of inflation to the target, despite the increased current price dynamics and high domestic demand,” he added. he added.
Markets had widely expected the central bank to raise interest rates by another 200 points on Friday, after taking such a step in October as part of an ongoing effort to tamp down inflation triggered by the military costs of Moscow's invasion of Ukraine and Western sanctions on its key export.
The bank on Friday said it will assess the need for a key interest rate hike at its upcoming meeting in February. It currently forecasts that annual inflation will fall to 4% in 2026 and remain there in the long term.
Russia's consumer price index is now more than twice as high, with annual inflation reaching 9.5% as of December 16, the bank said on Friday, noting continued pressure, especially in the household and corporate sectors. The Consumer Price Index reached an annualized 8.9% in November, up from 8.5% in October. This increase was largely due to rising food prices, with the increase in prices of milk and dairy products this year.
Inflation 'a worrying signal'
The maintenance of interest rates comes even after Russian President Vladimir Putin admitted during his annual question-and-answer session with Russian citizens on Thursday that inflation in the country was problematic and that there is evidence that the economy is overheating. He emphasized, however, that Russia could still achieve 3.9-4% economic growth this year.
“Of course, inflation is such a worrying signal. Just yesterday, when I was preparing for today's event, I talked to the President of the Central Bank, Elvira (Nabiullina), who told me that it was already around 9.3%. But wages have increased by 9% in real terms, I want to emphasize this – in real terms minus inflation – and the disposable income of the population has also increased,” he said, according to comments reported by Interfax and translated by Google.
The International Monetary Fund predicts that Russia will grow at 3.6% this year before slowing to 1.3% in 2025.
“A sharp slowdown,” the IMF said, was expected “as private consumption and investment slow in the face of reduced labor market tightness and slower wage growth.”
“What we are currently seeing in the Russian economy is a resistance to capacity constraints” – Alfred Kammer, director of the IMF's European Department, – he stated when the fund published its latest economic forecasts in October.
“So we have a positive output gap, or to put it another way, the Russian economy is overheating. What we expect next year is simply the impact that excess supply capacity will not be able to sustain for very long. Therefore, we see an impact on the move to more normal territory, which is, of course, supported by the tight monetary policy of the Central Bank of Russia,” he said.
“Tight monetary policy aimed at reducing inflation is slowing down aggregate demand, which will have such consequences for GDP in 2025. Therefore, we will see a slowdown in 2025,” Kammer added.