150-Basis Point Hike in Key Russian Interest Rate

March 3, 2014

At successive scheduled meetings last October, November, December and mid-February  of the Central Bank of Russia’s Board of Directors, the Russian key policy interest rate had been left at 5.5%, but officials lifted such today after an unscheduled meeting to 7.0%.  Previous reasons for unchanged policy in the face of above-target CPI inflation were the low rate of Russian GDP growth, soggy business confidence, and a predicted 1 percentage point decline of inflation over the course of 2014, reaching the 5.0% central bank target by the end of the year.  However, the February statement foreshadowed conditions under which monetary policy would need to be tightened.

Major sources of uncertainty for this forecast are inflationary risks related to accelerated price growth at the end of 2013 and observed currency depreciation. If the negative impact of these factors spills over to the prices of a wide range of goods and services and to the household expectations, the probability of inflation deviating from the mid-term targets will increase. In this case, the Bank of Russia will be ready to tighten its monetary policy.

Today’s statement was terse in contrast to the typical offering, with just a single sentence explanation for the 150-basis point rate hike: “The decision is aimed at preventing the risks for inflation and financial stability arising from the recent increase in financial market volatility.”  Left unsaid is that today’s wave of risk aversion was not some far-external development but the provocative incursion of Russian soldiers in Crimea.  The next scheduled policy meeting is on March 14.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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