Russia Monetary Policy December 2021

Russia: Central Bank raises key policy rate sharply in December

At its meeting on 17 December, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate by 100 basis points to 8.50%, after raising it by 75 basis points in October. The move, which marked the seventh consecutive hike in 2021, was broadly in line with market expectations.

The decision was once again driven by persistently elevated price pressures. Inflation jumped to a near six-year high of 8.4% in November (October: 8.1%), thus sprinting further above the Bank’s 4.0% target, amid faster growth in demand relative to production expansion capacity. Moreover, preliminary data shows that inflation remained unchanged through year-end, while households’ inflation expectations hit a fresh five-year high in December.

In the accompanying statement, the Bank somewhat softened its hawkish tone, noting that easing global supply disruptions should allow for some moderation of price pressures. That said, the Bank highlighted that “the balance of risks for inflation is markedly tilted to the upside”, which in turn may “bring about a more substantial and prolonged upward deviation of inflation from the target”. Despite inflation overshooting its 2021 target, the Bank kept its end-2022 forecast stable at 4.0%–4.5%. Although some of our panelists forecast another rate hike in the first quarter, the absolute majority sees the key policy rate ending the year below the current level.

Commenting on the monetary policy decision, Dmitry Dolgin, chief Russia economist at ING, said:

“Today’s key rate decision and the commentary should be largely neutral for debt and FX markets. The cautious tone of the commentary and the Bank of Russia’s reiterated commitment to achieving 4.0%–4.5% CPI by the end of next year suggests that further rate hikes remain a possibility, but the slight softening in tone indicates that the upside should be limited to 50 bps from the current level. Meanwhile, assuming the stabilization of CPI and expectations in the next couple of months, which is our base case assumption at the moment, a flat 8.5% key rate is a possibility. In any case, any easing in the key rate approach is unlikely to be seen at least until the second half of next year.”

The Bank of Russia will hold its next key rate review meeting on 11 February.

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