Central Bank of Russia hikes rates by 200 basis points in July

At its meeting on 26 July, the Central Bank of the Russian Federation (CBR) decided to hike the key rate by 200 basis points to 18.00%. The decision, which followed four consecutive holds this year, had been priced in by markets. As a result, the key rate has now been increased by a cumulative 1,050 basis points since July 2023.

The Bank determined that further hikes and a longer period of tight monetary policy were required to drive inflation toward its 4.0% target. Despite noting one-time factors—frost conditions hampering crop yields—that fueled price pressures since its last meeting, the CBR assessed that inflation has skyrocketed since January—significantly outpacing its April forecasts. Additionally, the Bank observed that growth in domestic demand continues to outstrip supply capacity—largely owing to a strained labor market amid military mobilization efforts—as well as noting increases in inflation expectations plus credit and wage growth. Meanwhile, the CBR updated its forecasts for this year: The Bank now sees inflation averaging 6.5–7.0% in 2024 compared to its April forecast of 6.2–6.4%, and it raised its projection for economic growth by 100 basis points to 3.5–4.0%.

In its communiqué, the CBR once again struck a more hawkish tone, indicating that “for inflation to begin decreasing again, monetary policy needs to be tightened further”. In a subsequent statement, Governor Elvira Nabiullina reaffirmed that a policy pivot is not on the books for 2024 and stated that the current hike was aimed at preventing high inflation coupled with low economic growth. The CBR admitted that upside inflationary risks had intensified since it had last convened, stemming from fiscal stimulus and unfavorable exchange rate movements resulting from geopolitical tensions and international sanctions. Our panel sees room for one additional, small-sized hike this year, though a majority of panelists expect the CBR to hold through year-end. The CBR will convene next on 13 September.

Goldman Sachs’ Clemens Grafe expects the CBR to hold until year-end: “The Bank’s new forecasts are now closer to ours, although our inflation forecasts remain higher. We forecast growth of 3.5% for 2024, slowing to 1.2% in 2025, with inflation at end-year at 7.6% and at end-2025 at 5.3%yoy. Given our still higher inflation forecast we expect rates to be unchanged at 18% till year-end 2024 and then to fall to 14% by end-2025.”

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