Russia’s apex bank raise key rate to 8.5%

On Friday, Russia’s central bank took the unexpected step of raising its key interest rate by 100 basis points to 8.5%, signalling a response to the mounting inflationary risks driven by a weak rouble, tight labour market conditions, and robust consumer demand.

This rate increase marks the first time in over a year that the central bank has adjusted its rates. The move comes after gradually reversing an emergency hike made in late February the previous year, when Russia’s military actions in Ukraine led to the imposition of sanctions by Western countries. Prior to this recent rate hike, the central bank had maintained rates at 7.5% since the last cut in September.

In its statement, the Bank of Russia indicated the possibility of further rate increases in upcoming meetings, with the aim of stabilising inflation near 4% by 2024 and beyond.

The decision took many analysts by surprise, as a popular poll had predicted a more modest 50-basis-point rate hike. However, the central bank’s move was influenced by recent inflation data, revealing a notable increase in households’ inflation expectations for July and a rapid acceleration in Russia’s weekly consumer prices.

The Russian currency has been under pressure following a failed armed mutiny by the Wagner mercenary group in late June. Additionally, attacks on Russian infrastructure, which Moscow attributes to Ukraine, have dampened risk appetite and added to economic uncertainties.

Central Bank Governor Elvira Nabiullina is expected to provide further insights into the bank’s forecasts and policy decisions during a media briefing at 1200 GMT. As Russia grapples with rising inflation and economic challenges, attention will be on the central bank’s plans to address these issues and ensure stability in the financial landscape.