Russia Central Bank Halts Easing

Russia’s central bank left its interest rate unchanged on Friday after six consecutive rate cuts as inflation expectations moved higher.

The Board of Directors of the Bank of Russia decided to retain the key interest rate at 7.50 percent, as widely expected.

After Russia invaded Ukraine in late February, the central bank hiked its interest rate sharply to 20.00 percent from 9.50 percent. Later, the bank has lowered the rate by a cumulative 1250 basis points since April.

Although consumer price inflation slowed 12.9 percent in October, inflation expectations of households and businesses slightly increased relative to the summer months, the bank noted.

“While the partial mobilisation may mainly create disinflationary pressure in the coming months due to subdued consumer demand, its subsequent effects will be pro-inflationary as it adds to supply-side restrictions in the broader economy,” the bank said.

The bank raised its inflation forecast to 12.0 -13.0 percent this year from 11.0 -13.0 percent. Inflation is expected to drop to 5.0-7.0 percent in 2023 and return to 4.0 percent in 2024.

In the medium-term, proinflationary risks still dominate and have grown slightly since mid-September, the bank observed.

The economy is forecast to contract 3.0-3.5 percent in 2022, the bank said. The rate is expected to remain negative in 2023, at -4.0 to -1.0 percent. However, the bank expects the economy to start growing in the second half of 2023. In 2024-2025, GDP will grow 1.5-2.5 percent annually.

The central bank is likely to remain focused on inflation risks at its upcoming meetings and the scope for further interest rates cuts is now limited, Capital Economics economist Liam Peach, said.

There will be a narrow window for easing next year as inflation falls closer to its 4 percent target but just one more 50 basis point interest rate cut is likely in 2023, the economist added.

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