Russia’s Central Bank Holds Interest Rates Steady Amid Inflation Concerns
In a surprise move, Russia’s central bank has decided to keep its key interest rates unchanged at 21%, citing improved monetary tightness that has created the conditions to tackle high inflation.
Taming Sky-High Inflation
The bank noted that monetary conditions have tightened more significantly than expected, thanks to factors independent of its monetary policy. This has led to a notable increase in interest rates for borrowers and a cooling of credit activity, creating the necessary prerequisites for resuming disinflation processes and returning inflation to its target.
Markets React
Markets had widely expected the central bank to hike interest rates by another 200 basis points, following a similar move in October. However, the bank has opted to assess the need for a key rate increase at its upcoming meeting in February.
Inflation Forecast
The bank currently forecasts annual inflation to decline to 4% in 2026 and remain at this target in the forward horizon. However, Russia’s consumer price index is currently more than twice this rate, with annual inflation hitting 9.5% as of December 16.
Food Prices Soar
The increase in inflation is largely driven by rising food prices, with the cost of milk and dairy products soaring this year. Russian President Vladimir Putin has acknowledged that inflation is a problem and that there is evidence of the economy overheating.
Economic Growth
Despite inflation concerns, Putin is optimistic about Russia’s economic growth, predicting 3.9%-4% growth this year. The International Monetary Fund predicts a slightly lower growth rate of 3.6% this year, followed by a deceleration to 1.3% growth in 2025.
IMF Warns of Slowdown
The IMF attributes the expected slowdown to reduced tightness in the labor market and slower wage growth. Alfred Kammer, director of the European Department at the IMF, notes that the Russian economy is pushing against capacity constraints and is overheating, which will eventually lead to a slowdown.
Monetary Policy
The Central Bank of Russia’s tight monetary policy is aimed at bringing down inflation, which will slow down aggregate demand and have an impact on GDP in 2025. As the bank navigates the complex landscape of inflation and economic growth, its decisions will be closely watched by markets and economists alike.
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