Russia hikes interest rates by 350bps to 12% in an emergency meeting

August 15, 2023 (MLN): Bank of Russia decided to raise the key rate by 350 basis points to 12% in order to limit risks to price stability, the latest data issued by the Central Bank of Russia showed today.

As per the press release issued on the decision of the Board of Directors of the Bank of Russia, inflationary pressure continues to increase. As of August 07, annual inflation increased to 4.4%.

At the same time, the current rate of price growth continues to accelerate.

After the rate announcement, the ruble briefly rose in value against the US Dollar but then lost ground immediately after. It remains one of the three weakest currencies in developing economies this year, dropping more than 24%.

Inverted Chart

On average, over the past three months, seasonally adjusted current growth was 7.6% on an annualized basis. The same indicator of core inflation increased to 7.1%.

The increase in domestic demand, which exceeds the capacity to expand output, reinforces persistent inflationary pressure and influences the dynamics of the ruble exchange rate through increased demand for imports.

As a result, the pass-through effect of the ruble depreciation to prices increases and inflation expectations rise.

Going forward, maintaining the current rate of price growth at the achieved levels means a significant risk of inflation deviating upwards from the target in 2024.

The decision taken by the Bank of Russia is aimed at ensuring such dynamics of monetary conditions and domestic demand as a whole, which are necessary for the return of inflation to 4% in 2024 and its stabilization near 4% in the future.

The Bank of Russia will make further decisions on the key rate, taking into account the actual and expected inflation dynamics relative to the target, the process of economic restructuring, as well as assessing the risks from internal and external conditions and the reaction of financial markets to them

 According to the forecast of the Bank of Russia, taking into account the ongoing monetary policy, annual inflation will return to 4% in 2024.

The next meeting of the Board of Directors of the Bank of Russia, which will consider the issue of the key rate level, is scheduled for  September 15, 2023.

Copyright Mettis Link News