Russia Monetary Policy March 2021

Russia: Central Bank delivers surprise hike in March

At its meeting on 19 March, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate by 25 basis points to 4.50%. The move, which came as a surprise to most market analysts, marked the first increase in more than two years and was chiefly driven by mounting inflationary pressures.

Inflation soared to 5.7% in February (January: 5.2%) and had risen further to an over four-year high of 5.8% by mid-March, thus significantly overshooting the Bank’s forecast and its 4.0% target, and prompting a tightening of the policy stance. In terms of economic activity, a sturdier-than-expected recovery in demand amid healthier conditions at home and abroad also supported the Bank’s decision, as the economy gradually returns towards pre-pandemic levels.

In the accompanying statement, the Bank’s hawkish tone suggested that more rate hikes are on the table in the short term. According to the CBR, “the balance of risks has shifted towards pro-inflationary ones”, forcing it to revise projections of inflation returning to its 4.0% target from late 2021 to mid-2022. A rapid recovery in consumer demand, a healthier external backdrop and geopolitical volatility all present upside risks to inflation, in the Bank’s view.

Commenting on the decision, Artem Zaigrin, chief economist at SOVA Capital, said:

“CBR could proceed with further rate hikes in 2Q21, meaning the key rate could reach 5% by YE21, in our view. The downside risks to our expectations could arise from Russia’s economic recovery slowing down in 2H21. […] We are concerned that the recovery could stall by 3Q21 without a further fiscal stimulus, which we could see in the coming months. The low pace of mass vaccinations combined with new Covid-19 strains could also be a risk.”

The Bank of Russia will hold its next key rate review meeting on 23 April.

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