Russia Monetary Policy July 2021

Russia: Central Bank delivers sharpest rate hike in over six years in July

At its meeting on 23 July, the Board of Directors of the Central Bank of the Russian Federation (CBR) raised the key interest rate by 100 basis points to 6.50%. The move represented the sharpest increase in rates since late 2014 and marked the fourth consecutive hike since March.

In line with the previous hike, the decision was driven by elevated price pressures. Inflation accelerated to 6.5% in June (May: 6.0%), marking the highest reading in nearly five years and climbing further above the Bank’s 4.0% target. The price rally continued to gain steam on the back of a robust economic recovery, with GDP estimated to have bounced back to its pre-crisis levels in Q2. Strengthening demand in many industries outpaced their capacity to ramp up output, while consumer lending accelerated, stoking price pressures in turn. Soaring prices for vegetables and tourism services also added fuel to the rally.

In the accompanying statement, the Bank kept a firmly hawkish tone and did not rule out further policy tightening ahead, stating that the rapid economic recovery had “significantly shifted the balance of risks towards pro-inflationary ones and may cause inflation to deviate upwards from the target for a longer period.” As a result, the CBR revised its inflation forecast for end-2021 by one percentage point to 5.7%–6.2%. However, the Bank expects inflation to slow to 4.0%–4.5% in 2022 and stay close to 4.0% further ahead—at which point it projects the key rate to return to its long-term neutral range, which is currently estimated at 5.0%–6.0%.

Commenting on the decision and the monetary policy outlook, Artem Zaigrin, chief Russia economist at SOVA Capital, said:

“While the provided forecast points to a tighter policy stance in 2021–2022, the CBR’s guidance and forecasts leave space for additional rate hikes, which we estimate at 25–50 basis points in total for the rest of 2021. In our view, the short-term inflationary risks (harvest issues and disruptions in supply chains) could push inflation past 6.5% in the coming months, while Russia’s economic dynamics could start to slow down as the effect from high savings wanes. As a result, we do not rule out an additional hike of 25 basis points in September if inflation rises further.”

The Bank of Russia will hold its next key rate review meeting on 10 September.

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