Russia Monetary Policy October 2021

Russia: Central Bank raises key policy rate sharply in October

At its meeting on 22 October, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate by 75 basis points to 7.50%, after raising rates by 25 basis points in September. The move, which marked the sixth consecutive hike this year, surprised market analysts who had expected a softer increase.

The decision came on the back of stubbornly elevated price pressures. Inflation soared to an over five-year high of 7.4% in September (August: 6.7%), thus shooting further above the Bank’s 4.0% target. The acceleration was partly driven by buoyant domestic demand, which continued to exceed production expansion capacity in several sectors. Notably, however, inflation rose despite easing economic activity growth in Q3, suggesting that supply-side constraints were in the driver’s seat of the price rally. Moreover, the labor market exerted upward price pressures amid shortages in many sectors and record-high vacancies.

In the accompanying statement, the Bank maintained its hawkish tone, saying that “if the situation develops in line with the baseline forecast, [it] holds open the prospect of further key rate rises at its upcoming meetings”. High inflation expectations among businesses and consumers prompted the CBR to revise its end-2021 inflation forecast up by 1.7 percentage points to 7.4%–7.9%, although the Bank kept its end-2022 forecast stable at 4.0%–4.5%. Meanwhile, the Bank expects GDP to grow 4.0%–4.5% in 2021, and 2.0%–3.0% in 2022–2024. All in all, the CBR’s tone suggests that further monetary policy tightening is very likely in the coming months.

Commenting on the monetary policy outlook, Anatoliy Shal, Russia economist at JPMorgan, said:

“Our updated forecast assumes two more 25bp hikes at December and February meetings, with the peak rate at 8.0% (7.5% previously). That said, in case our inflation forecast is about right, by H2 2022 the level of the real rate will start looking too high and the focus will probably shift to policy easing. Although policy tightening in DM may be an obstacle, we think the CBR should nevertheless be able to start a gradual reversal of recent hikes by end-2022. We tentatively assume two 25bp cuts in Q4 2022 with further easing to follow in 2023.”

The Bank of Russia will hold its next key rate review meeting on 17 December.

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