Russia Monetary Policy December 2023

Russia: Central Bank hikes key rate again in December

At its meeting on 15 December, the Central Bank of the Russian Federation (CBR) hiked its key policy rate by 100 basis points to 16.00%. This marked the fifth consecutive meeting where the CBR increased borrowing costs as it continued its fight against spiraling inflation. The Bank has now raised rates by 850 basis points since July, including an emergency hike in August.

The Bank’s continued monetary policy tightening was driven by rising price pressures. Inflation jumped to 7.5% in November from 6.7% in October, and the Bank expects it to hover around this level through year-end. Moreover, inflation expectations among households and businesses continued to increase amid a weak ruble, booming government spending and a labor force crisis due to military mobilization. Meanwhile, the Bank expects GDP growth in 2023 to outperform its October forecast and exceed 3.0%, adding further fuel to the inflation rally.

The CBR remained hawkish in its communique, saying that “the return of inflation to target in 2024 and its further stabilization close to 4% assume that tight monetary conditions will be maintained in the economy for a long period.” This comes against the backdrop of elevated pro-inflationary risks. An increase in domestic demand will likely continue to outpace the expansion of supply next year. Moreover, due to limited labor resources, productivity growth will likely lag further behind real wage growth. Meanwhile, geopolitical tensions and international sanctions could further weaken demand for Russian exports, driving up inflation through unfavorable exchange rate movements. Lastly, a further fiscal expansion would probably require additional monetary policy tightening to keep inflation in check.

The majority of our panelists are currently re-evaluating their forecasts. The Bank’s next meeting is scheduled for 16 February.

Commenting on the outlook, Anatoliy A Shal, analyst at JPMorgan, said:

“We believe today’s hike was the last step in this tightening cycle and the current policy stance is already sufficiently (if not overly) restrictive. The next stage of policy discussions will likely focus on the appropriate duration of keeping the policy this tight.[…]However, we suspect that, as inflation momentum drops in 1H24, the pressure will build to reverse part of the recent policy tightening. We anticipate the first cut in 2Q24, with the key rate to be reduced to around 10.00% by end-2024.”

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