Russia Monetary Policy September 2021

Russia: Central Bank hikes key policy rate again in September

At its meeting on 10 September, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate by 25 basis points to 6.75%. The move marked the fifth consecutive hike since March and brought the rate to the highest level since September 2019.

The move was once again driven by heightened price pressures. Inflation jumped to a five-year high of 6.7% in August from 6.5% in July, thus climbing further above the Bank’s 4.0% target. Sturdy growth in domestic demand amid a sustained economic recovery underpinned the upward momentum in prices, as it continued to notably exceed capacity to expand production in several key sectors. Rising global commodity prices added further upward pressure.

In the accompanying statement, the Bank strengthened its hawkish tone slightly and sounded more decisive on further monetary policy tightening going forward, amid elevated inflation expectations among businesses and consumers. The Bank noted that it will hike the rate further “if the situation develops in line with the baseline [inflation] forecast”, suggesting that more than one rate increase is likely as pro-inflationary factors continue to dominate the panorama. Notably, the CBR provided no inflation forecasts for end-2021 (previously reported: 5.7%–6.2%), highlighting underlying uncertainty. 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 monetary policy outlook, Ariel Chernyy, Russia economist at UniCredit, said:

“We think that one more hike at the next meeting in October will be enough, bringing the key rate to 7.00% by the end of the year. Risks are tilted towards more rate increases, with extra hikes possible in December or early 2022. But given the temporary nature of inflation, further into 2022, price pressures will likely abate and justify the start of an easing cycle, with the key rate reaching 6.0%–6.5% by the end of next year.”

The Bank of Russia will hold its next key rate review meeting on 22 October.

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