Russia seen to hike rates to 14% as inflation pressure remains high

MOSCOW  – Russia will hike its benchmark interest rate to 14 percent on Friday and give another hawkish signal to the market, a Reuters poll showed, with the central bank needing to rein in accelerating inflation exacerbated by the weakness of the ruble.

Nineteen of 21 analysts and economists polled by Reuters on Monday predicted that the Bank of Russia would raise its key rate to 14 percent at Friday’s meeting from the current 13 percent. One tipped an increase to 13.75 percent and another forecast a sharper hike to 15 percent.

“Inflationary pressure and most importantly inflationary expectations in the economy remain elevated,” said Alexander Fetisov, head of Rosselkhozbank’s capital markets analytics department.

Annual inflation accelerated to 6.38 percent as of Oct. 16, above the bank’s 4 percent target, pushed up by Russia‘s budget deficit, labor shortages, strong consumer demand and the ruble’s depreciation this year.

The ruble’s slide forced the central bank into an emergency 350 basis-point rate hike in August, accounting for most of its 550 basis points of monetary tightening since July.

Seeking to regain some control over the ruble rate, President Vladimir Putin has ordered the mandatory sale of foreign currency revenues for 43 groups of exporters, a capital control that came into force last week. The ruble has strengthened sharply since that requirement was announced.

Those demands, and the bank’s previous tightening steps, are holding the key rate back from further increases for now, said ACRA rating agency’s Dmitry Kulikov.

The central bank could raise rates as high as 15 percent, said Mikhail Vasilyev, chief analyst at Sovcombank, forecasting a hike to 14 percent but expecting a hawkish signal that additional increases may still be needed.

“The central bank now needs to maintain tight rhetoric to convince market participants that high rates are here for a long time,” Vasilyev said, warning that should the ruble weaken towards 110 per dollar next year, rates could reach as high as 20 percent.

Finam brokerage’s Olga Belenkaya said the central bank would consider holding rates steady, raising to 14 percent – her expected scenario – or hiking even more sharply.

“For now there remains an important unknown element of the puzzle – fresh data on inflation expectations,” Belenkaya said.

Households’ inflation expectations, which the central bank watches closely, rose to 11.7 percent in September. Data for October is due to be published on Tuesday.

In late February 2022 Russia ramped up its benchmark rate to 20 percent in an emergency move after Moscow dispatched tens of thousands of troops to Ukraine, which led to increasingly wide-ranging Western sanctions being imposed in response.

The key rate was then gradually cut, to as low as 7.5 percent, before rising again.