Central Bank of the Russian Federation

July 25, 2014

There’s no such thing as a free war, and a direct consequence of President Putin’s reckless behavior with neighboring Ukraine has been a weak ruble that’s imported inflation and forced the Russian central bank to tighten monetary policy.  This in turn points to slower economic growth.  The key central bank interest rate was earlier hiked by 150 basis points to 7.0% on March 3 and by a further 50 bps on April 25 to 7.5%.  A third unexpected increase to 8% was announced today in a statement that blames above-target inflation largely on the lagged effect of previous ruble depreciation caused by “geopolitical tension.”  The statement acknowledges a heightened risk of more elevation in expected inflation and aims through tighter monetary policy to reduce inflation to 6-6.5% by the end of this year and eventually in the medium term to the target of 4.0%.  Upside risks to inflation continue, however, in the form of “aggravation of geopolitical tension, adjustments in monetary policy of foreign central banks and the potential impact of those factors on national currency exchange rate dynamics, tax and tariff policy changes.”  Accordingly, central bank officials conclude by not ruling out the possibility of more interest rate increases: “If high inflation risks persist, the Bank of Russia will continue raising the key rate.”  The next Board of Directors policy meeting is scheduled for September 12.

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



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