The Bank of Russia made a significant move on Friday by raising the key rate by 2 percentage points to 15% per annum. This marks the largest increase since May of last year. The decision was based on the central bank’s assessment that current inflationary pressures have surpassed their expectations.
The central bank stated that domestic demand in Russia has been steadily rising and is now exceeding the economy’s capacity to expand the production of goods and services. Additionally, inflation expectations remain high, and lending growth rates continue to be high as well. In order to address these challenges, the central bank believes that it is necessary to tighten monetary policy further to limit the upward deviation of inflation from its target of 4% by 2024.
According to the central bank’s updated forecast, annual inflation in Russia is projected to be between 7.0% and 7.5% in 2023. However, with the current monetary policy stance, it is expected to decline to 4.0-4.5% in 2024 and remain close to 4% thereafter.
The central bank highlighted that recent data for the third quarter suggests that the Russian economy is expanding at a faster pace than expected in September. It attributes this to high domestic demand, which is causing an upward deviation from the path of balanced growth and strengthening persistent inflationary pressures.
Following the news of the rate hike, the Russian ruble strengthened in the foreign exchange market. It traded below 93 to the dollar and below 98 against the euro as of 2:00 pm local time in Moscow.
This decision by the Bank of Russia reflects its commitment to address rising inflation in the country. By tightening monetary policy, the central bank aims to curb inflation and bring it back to its target level. It acknowledges the challenges posed by high domestic demand and lending growth rates, which have contributed to inflationary pressures. The rate hike is seen as a necessary step to ensure the stability of the Russian economy and maintain price stability.
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