A Russian state flag flies over the Central Bank headquarters in Moscow, Russia, Aug 15, 2023. A sign reads: “Bank of Russia”. REUTERS/Shamil Zhumatov/File photo
MOSCOW —Russia’s central bank held its key interest rate at 16 percent on Friday, opting to leave borrowing costs unchanged after five successive rate hikes since last summer, still grappling with stubborn inflation pressure.
The central bank had raised rates by 850 basis points since July, including an unscheduled emergency hike in August as the ruble tumbled past 100 to the dollar and the Kremlin called for tighter monetary policy, but has lately signaled a more dovish approach.
The bank said returning inflation to its 4 percent target this year would require “tight monetary conditions…for a long period” and warned that inflationary pressures remained high, despite their easing from autumn peaks.
Analysts largely viewed the signal as neutral. Governor Elvira Nabiullina said the same. The bank had also considered hiking rates, she said, but a consensus to hold developed and a first rate cut is now likely in the second half of 2024.
Domestic demand was still outstripping production capacity, the bank said, with labor shortages still the key constraint on expanding the output of goods and services.
“A judgement on the sustainable nature of emerging disinflationary trends would be premature,” the bank said in a statement.
The balance of inflation risks is still tilted to the upside over the medium term, the bank said, pointing to elevated inflation expectations and suggesting that it has inflation concerns regarding high budget spending and sanctions impacting Russia’s terms of trade.
No more hikes?
Nabiullina declined to comment when asked about her health. She had been out of the public eye for almost a month before this week with an unexplained absence, that led rumors to swirl that she was in hospital.
Friday’s decision was in line with a Reuters poll of analysts, who expect interest rates to start coming down this year. Double-digit rates are expected to remain into 2025.
The bank‘s next rate-setting meeting is scheduled for March 22.
The bank raised its forecast for its average key rate range to 13.5-15.5 percent from 12.5-14.5 percent, suggesting that easing borrowing costs would take longer than previously thought.
The TASS news agency quoted President Vladimir Putin as saying he hoped that the bank‘s elevated rates were a temporary measure and would fall with inflation.
The bank slightly improved its 2024 economic growth forecast to 1-2 percent, from 0.5-1.5 percent. The International Monetary Fund expects Russia’s economy to grow 2.6 percent this year, but anticipates tough times ahead.
Higher for longer
Russia’s economy rebounded sharply from a slump in 2022, but the growth relies heavily on state-funded arms and ammunition production and masks problems that are hampering an improvement in Russians’ living standards.
“It is very optimistic to raise GDP at the same time as such tight policy,” said Yevgeny Kogan, a professor at Russia’s Higher School of Economics. “We won’t see any more rate hikes, but they plan to keep the rate at 16 percent for a long time.”
The central bank‘s tightening cycle began last summer when inflationary pressure from a tight labor market, strong consumer demand and the government’s budget deficit was compounded by the falling ruble.
Russia had gradually reversed an emergency hike to 20 percent which it made in February 2022 after Moscow sent its army into Ukraine, prompting sweeping Western sanctions. It cut rates to as low as 7.5 percent in 2023.