Russia Monetary Policy September 2018

Russia: Central Bank unexpectedly hikes key rate in September

At its 14 September meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) increased the key interest rate to 7.50% from 7.25%, surprising market analysts who had expected the rate to remain unchanged. Driven by rising upward risks to inflation in the Russian economy, the decision reversed the Bank’s over two-year easing cycle.

Although inflation remained below the Bank’s 4.0% target in recent months, the unfavorable external environment combined with a planned VAT increase is expected to stoke price pressures going forward. Additional U.S. sanctions, combined with a broad selloff in emerging-market assets sparked by Turkey’s currency crisis, caused the ruble to plunge in August, and the weakening should have a pass-through effect on prices. Accordingly, the CBR raised its inflation projections and now sees inflation ending the year between 3.8–4.2%, compared with 3.5–4.0% previously. On top of the rate hike, the Central Bank has also suspended USD purchases to shore up support for the ruble, following the fiscal rule.

Looking ahead, the Bank signaled that it will continue to take a cautious stance and that rates could be tightened further if deemed necessary. Previous forward guidance on the transition to neutral monetary policy was dropped from the accompanying press release and the CBR stated that inflation risks are titled to the upside. Elaborating on the outlook for monetary policy, Artem Arkhipov, head of Macroeconomic Analysis and Research Russia at Unicredit, comments:

“With market volatility unlikely to ease, and increased risks prompting a revision of the neutral rate, the easing cycle is over, with a few more hikes likely in the coming months.”

The next monetary policy meeting is scheduled for 26 October 2018.

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