Russia raises interest rates by 15% higher than expected due to budget pressures

MOSCOW (Reuters) – Russia’s central bank raised interest rates 200 basis points higher than expected to 15 percent on Friday, raising borrowing costs for the fourth straight meeting in response to a weak ruble, stubborn inflation and increased budget spending. .

The central bank has raised interest rates by 750 basis points since July, including an unscheduled emergency increase in August as the ruble fell below 100 basis points against the dollar and the Kremlin called for tighter monetary policy.

“Current inflationary pressures have increased significantly to a level higher than the Bank of Russia’s expectations,” the bank said in a statement, noting that domestic demand exceeds the provision of goods and services and high lending growth.

Governor Elvira Nabiullina said that the bank is also considering raising interest rates by 100 or 150 basis points, and said that the rate could be maintained or raised further this year. The next meeting is scheduled for December 15.

Nabiullina also said that budget was an important factor in Friday’s decision.

Russia is increasing government spending, pumping money into the defense sector to increase military production and pursuing what it calls its “own military operation” in Ukraine.

“The updated parameters for medium-term fiscal policy assume a slower-than-expected decline in fiscal stimulus in the coming years,” the bank said.

The bank also admitted for the first time that it may not succeed in returning inflation to its target of 4% next year, expecting the inflation rate at the end of 2024 to reach 4-4.5%.

“Today’s rate hikes appear to be a precursor to a tightening cycle in response to the fiscal announcements earlier this month,” said Liam Beach, chief emerging markets economist at Capital Economics.

The majority of analysts polled by Reuters expected an increase to 14%. The ruble jumped to its highest level in more than six weeks against the dollar after the decision.

Peak prices?

The central bank’s tightening cycle began this summer when inflationary pressures from a tight labor market, strong consumer demand and a budget deficit were exacerbated by a falling ruble.

Russia had gradually retreated from the emergency increase to 20% that it had undertaken in February 2022 after Moscow sent its forces into Ukraine, which led to the imposition of widespread Western sanctions. Rates were as low as 7.5% earlier this year.

The central bank said that inflation will range between 7.0 and 7.5 percent in 2023. The central bank had previously expected inflation at the end of the year to range between 6.0 and 7.0 percent. The annual inflation rate was 6.38% as of October 16.

The bank maintained its hawkish stance, indicating that tight monetary conditions would be maintained for an extended period, but withdrew guidance that it would consider the need for further hikes. Nabiullina described the signal as neutral.

But the bank set its key interest rate range for 2023 at 15-15.2%, suggesting interest rates could rise further and Nabiullina said that might be needed. In 2024, the rate is expected to reach 12.5-14.5%.

“In recent meetings, we raised the key interest rate with concrete steps and we will be ready to do so again if we do not see signs of a sustainable slowdown in inflation and a cooling of inflation expectations,” Nabiullina said.

Analysts were divided over what might come next.

“We have not reached the price limit,” said Dmitry Polevoy, chief investment officer of Locko-Invest. He said the bank left the door open to tightening monetary policy in December, but he was unsure what the situation would look like after that.

The lack of tight forward guidance means it is very likely that the headline rate has already reached the upper limit, said Sergey Konygin, an analyst at Sinara Investment Bank.

“I think the rate has peaked,” he said.

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