Russia: Central Bank hikes key rate in December
December 14, 2018
At its 14 December meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate to 7.75% from 7.50%, in the face of rising inflationary risks. Market analysts had been mixed as to whether the Bank would hike or hold rates. A weak ruble and mounting price pressures caused the Bank to reverse course in the second half of 2018, tightening interest rates after an over two-year easing cycle designed to support activity.
Elevated risks to the inflation outlook drove the Bank’s decision to hike rates in December. A hike in the VAT in January will increase price pressures at the start of 2019, which are already elevated due to a weak ruble. In addition, an uncertain global backdrop is casting a shadow on Russia’s inflation outlook, and renewed financial market volatility and capital outflows could heap further pressure upon the ruble. The threat of additional sanctions by the West could also hurt sentiment for Russian financial assets. The Bank stated in the accompanying statement that it sees inflation peaking in the first half of 2019 before easing to 5.0–5.5% by the end of 2019.
Looking ahead, the Bank signaled that it will continue to take a cautious stance and that rates could be tightened further if deemed necessary. The CBR stated that inflation risks are titled to the upside, while the risk of oil supply exceeding demand in 2019 has increased since its previous meeting, which could dent economic prospects if realized. Meanwhile, the Bank also announced that it would resume regular foreign currency purchases for the Finance Ministry as of 15 January 2019. The Bank had halted purchases in August after the sharp depreciation of the ruble.
The next monetary policy meeting is scheduled for 8 February.