Bank of Russia Surprises Market with 25-Basis Point Key Interest Rate Hike to 7.5%

September 14, 2018

According to a statement released by the Board of Directors, inflation is climbing toward 4% faster than expected and inflation expectations have moved slightly higher, warranting today’s decision to implement the central bank’s first rate increase since mid-December of 2014. The peak of 17.0% only was retained for 7 weeks. A series of reductions ensued at the end of January 2015 whose final moves were cuts of 50 basis points in September 2017, 25 bps in October, 50 bps in December, 25 bps in February 2018 and lastly another 25 bps to 7.25% in March 2018.

Today’s statement notes,

Changes in external conditions observed since the previous meeting of the Board of Directors have significantly increased proinflationary risks. The Bank of Russia forecasts annual inflation to be 5-5.5% in 2019 and return to 4% in 2020. This forecast takes into account the decisions taken with regard to the key rate and to the suspension of foreign currency purchases in the domestic market under the fiscal rule. The Bank of Russia will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets.

Whether, how soon, and how much further officials feel compelled to lift Russia’s key central bank rate will hinge in large part on the performance of the ruble. Like many emerging market currencies, it has depreciated in the face of capital outflows in spite of a generally resilient current account, which according to the statement, “remains high thanks to stable prices of Russian export goods and significantly exceeds the amount of external debt repayments scheduled for the coming months.” Officials project Russian GDP will grow 1.5-2.0% this year and by 1.2-1.7% in 2019.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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