Russia Raises Key Interest Rate Unexpectedly, Signals More Hikes

Russia’s central bank unexpectedly raised its key interest rate Friday, citing higher than forecast inflation and a faster than expected recovery in domestic demand.

The Board of Directors decided to increase the key rate by 25 basis points to 4.50 percent, the Bank of Russia said in a statement. Economists had expected the rate to remain at 4.25 percent.

The previous change in the rate was a quarter-point reduction in July last year.

The bank said that it “holds open the prospect of further increases in the key rate at its upcoming meetings.”

Inflation expectations of households and businesses remain elevated and the balance of risks has shifted towards proinflationary ones, the central bank said.

In her post-decision speech, the central bank governor Elvira Nabiullina said the bank has begun to return to neutral monetary policy.

“It is necessary to prevent further inflation acceleration,” Nabiullina said. “Inflation expectations need to be reduced as soon as possible.”

The central bank expects annual inflation to return to its target close to 4 percent in the first half of 2022 and to remain at that level further on.

Following the latest policy announcement, Capital Economics forecast quarter-point hikes in April and June, with additional tightening later this year taking the policy rate to 5.25 percent by year-end.

“The central bank went much further than anybody was expecting in delivering its guidance for significant monetary tightening to bring inflation down,” Capital Economics economist Liam Peach said.

“The CBR’s determination to rein in inflation and a possible increase in the threat of tighter sanctions later this year, argues strongly in favor of additional tightening,” the economist added.

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