On Friday, the Bank of Russia increased its key interest rate by 200 basis points to 15% per year, noting that inflation in the Russian economy had increased significantly, to a level above the expectations of the central bank.
The statement noted that as domestic demand has steadily risen, it has exceeded the ability of the economy to expand the production of goods and the provision of services. The central bank went on to say that expectations of inflation continue to be elevated, adding that lending growth rates are also elevated.
The statement said, “The updated medium-term parameters of fiscal policy assume a slower-than-expected decline in fiscal stimulus in the years ahead. Therefore, it is required to additionally tighten monetary policy to limit the upward deviation of inflation from target and return it to 4% in 2024.”
According to the updated forecast by the regulator, annual inflation in Russia in 2023 will rage between 7.0 and 7.5%. It goes on to predict that given the current monetary policy being implemented, in 2024 inflation will fall to 4.0% to 4.5%, and it will remain near 4% beyond that.
The statement also noted that recent third quarter data suggests the regulator underestimated the rate of economic expansion in September.
It stated, “High domestic demand is inducing the upward deviation of the Russian economy from the path of balanced growth. This is strengthening persistent inflationary pressures.”
Following the rate hike, the ruble gained strength. As of 2:00 PM local time in Moscow it was trading below 93 to the dollar and below 98 to the euro.
