Russian central bank surprises markets by keeping key rate at 21%

On Friday, Russia’s central bank unexpectedly left its key interest rates unchanged at 21%, citing increased monetary tightening that had created the conditions to control sky-high inflation.

“Monetary conditions tightened much more than anticipated in the October interest rate decision,” the bank said. sayinghighlighting “autonomous” factors of its monetary policy.

“Taking into account the notable increase in interest rates for borrowers and the cooling of credit activity, the achieved tightening of monetary conditions creates the necessary prerequisites for resuming disinflation processes and returning inflation to the target, despite of the current high price growth and high domestic demand,” he added.

Markets widely expected the central bank to raise interest rates by another 200 basis points on Friday, after taking that step in October amid an ongoing effort to rein in inflation fueled by the military costs of the US invasion of Ukraine. part of Moscow and by Western sanctions against its key raw materials. exports.

The bank said on Friday it would assess the need for a key rate hike at its next meeting in February. It currently forecasts that annual inflation will decline to 4% in 2026 and will remain at this target in the future.

Russia’s consumer price index is currently more than double this rate: annual inflation reached 9.5% on December 16, the bank said on Friday, pointing to persistent pressures, especially in the household and business sectors. The consumer price index reached 8.9% annually in November, compared to 8.5% in October. The increase was largely due to rising food prices, with the cost of milk and dairy products rising this year.

The hold on interest rates comes even after Russian President Vladimir Putin admitted during his annual question-and-answer session Thursday with Russian citizens that the The country’s inflation was problematic. and that there was evidence of the economy overheating. However, he stressed that Russia could still achieve between 3.9% and 4% economic growth this year.

“Of course, inflation is an alarming sign. Just yesterday, while I was preparing for today’s event, I spoke with the president of the Central Bank, Elvira (Nabiullina), who told me that it was already around 9.3%. But the “Wages have grown by 9% in real terms, I want to emphasize this, in real terms minus inflation, and the disposable income of the population has also grown,” he said, according to comments reported by Interfax and translated by Google.

The International Monetary Fund predicts that Russia will reach 3.6% growth this year, before a slowdown to 1.3% in 2025.

The “sharp slowdown,” the IMF said, was expected “as private consumption and investment slow amid less rigidity in the labor market and slower wage growth.”

“What we are seeing right now in the Russian economy is that it is struggling with capacity constraints,” said Alfred Kammer, director of the IMF’s European Department. he said when the fund released its latest economic outlook in October.

“So we have a positive output gap, or you could say another way: the Russian economy is overheating. What we expect for next year is simply also the impact that exceeding its supply capacity cannot be maintained for long. So we have “We see an impact in moving towards more normal territory there and of course that is supported by tight monetary policy by the Central Bank of Russia,” he said.

“A strict monetary policy, to reduce inflation, slows down aggregate demand, and in 2025 it will have these effects on GDP. That is why we are seeing the slowdown in 2025,” Kammer added.