Russian central bank hikes rates by 200 bps to 18%, highest in more than two years By Reuters

By Gleb Bryanski and Alexander Marrow

MOSCOW (Reuters) – Russia’s central bank hiked its key interest rate by 200 basis points to 18% on Friday as it grapples with high inflation and an overheated economy, bringing the cost of borrowing to its highest in more than two years.

The regulator also revised its inflation forecast for 2024, raising it to 6.5–7.0% and signalled it may increase rates further. It sees annual inflation declining to 4.0–4.5% in 2025, in line with its target of 4%.

The market was expecting the hike, a Reuters poll of economists showed, though some dissenting voices in the Russian elite had favoured a more dovish approach.

The key rate is now at its highest since April 2022. The Bank of Russia raised rates to 20% in an emergency move soon after the Kremlin sent Russian troops into Ukraine in February 2022.

„Inflation has accelerated and is developing significantly above the Bank of Russia’s April forecast. Growth in domestic demand is still outstripping the capabilities to expand the supply of goods and services,” the bank said in a statement.

„Returning inflation to the target requires considerably tighter monetary conditions than presumed earlier. The Bank of Russia will consider the necessity of further key rate increase at its upcoming meetings,” the central bank added.

    Governor Elvira Nabiullina is due to address the media at 1200 GMT. The next rate decision is scheduled for Sept. 13.

The central bank noted an „upward deviation of the Russian economy from a balanced growth path” and pointed to labour shortages and continued expansion of retail and corporate lending as key factors behind high inflation.

The central bank raised its forecast for GDP growth in 2024 to 3.5%-4.0% from a previous forecast of 2.5%-3.5%. It did not mention the term „overheating”, used by many economists to describe the current state of the economy, in its announcement.

Just before the rate announcement, the Kremlin said that there were „various views regarding the overheating of the economy”. It added that „necessary measures are being taken”.

    The Bank of Russia raised rates by 850 basis points in the second half of 2023, including an unscheduled emergency hike in August as the rouble tumbled past 100 to the dollar and the Kremlin called for tighter monetary policy.  

    Inflation, the bank’s main area of concern, stood at 7.4% in 2023, compared with 11.9% in 2022. It is currently running at 9.18% and economists expect it to remain well above the central bank’s 4% target this year.