Russia’s Key Interest Rate Rises to 6.5%

The central bank of Russia raised its key interest rate to 6.5% from 5.5% on Friday. It is the country’s sharpest rate hike since late 2014. Considering the high inflation, further rate increases were likely. It is the fourth time this year that rates were hiked as Russia’s CPI YoY overshot estimates and sped up to 6.5% last month. That was its highest since August 2016, when the key rate was 10.5%.

The decision to raise the rate was in line with expectations that the central bank would opt for a 100-basis hike after raising rates by 50 basis points in June.

As of July 19, inflation was 6.5% and will finish this year at 5.7-6.2%. It is expected to return to 4.0-4.5% in 2022, with the central bank targeting inflation at 4%.

The current inflation has been one of the key concerns among households as it is affecting people’s living standards. This comes ahead of the parliamentary elections in September. 

Higher rates help subdue consumer inflation with more expensive lending, although, in contrast, more expensive lending hampers economic recovery. Also, higher rates increased the appeal for bank deposits while they supported the Russian currency by strengthening demand for Russia’s high-yielding assets.

The Central Bank’s Forecasts and Monetary Policy Plans

In a statement, the central bank said that if the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increases at its upcoming meetings.  After the rate move, the rouble was largely flat at 73.65 against the dollar.

The central bank has also said it revised forecasts to the economic growth of 4.0-4.5% in 2021 compared to its earlier prediction of 3-4% growth.

Governor Elvira Nabiullina is expected to provide some clarity on the central bank’s forecasts and monetary policy plans at an online news conference at 1200 GMT. Notably, the next rate-setting meeting is scheduled for Sept. 10.

Elsewhere, the South African Reserve Bank (Sarb) kept lending rates unchanged. That was in a unanimous decision at its July policy meeting on Thursday. However, Governor Lesetja Kganyago warned that the bank would probably have to raise rates soon as inflation risks were mounting. For the last five meetings in a row, the bank has kept the repo rate at a record low of 3.5%.