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Russia’s central bank raised its benchmark interest rate by 200 basis points to 18% on Friday to curb high inflation and an overheated economy, pushing borrowing costs to their highest level in more than two years.
The central bank also revised its inflation forecast for 2024 to between 6.5% and 7.0%, and hinted that further increases are possible. However, the central bank said annual inflation will fall to 4.0-4.5% in 2025, in line with its 4% target.
A Reuters poll of economists showed markets expected a rate hike, although some in Russia’s economic elite disagreed and expected a less aggressive approach.
The current base rate is the highest since April 2022. After the Kremlin launched a full-scale military aggression against Ukraine in February 2022, the Russian Central Bank urgently raised the interest rate to 20%.
“Inflation has accelerated and is moving at a significantly higher rate than the Bank of Russia’s April forecast. The growth of domestic demand still outstrips the potential for growth in the supply of goods and services,” the bank said in a statement.
“The return of inflation to the target level requires tighter monetary conditions than expected so far. The Bank of Russia will consider the need for a further increase in the base interest rate at its upcoming meeting,” the central bank added.
The central bank pointed out that “the Russian economy has deviated from the path of balanced growth” and highlighted labor shortages and continued expansion of private and corporate loans as the main factors for high inflation.
The central bank raised its 2024 gross domestic product (GDP) growth forecast to 3.5-4.0% from 2.5-3.5% previously. In his statement, he did not mention the word “overheating,” which many economists use to describe current economic conditions.
Just before announcing the rate hike, the Kremlin said there were “different views on overheating of the economy,” adding that “necessary measures will be taken.”
The Russian Central Bank has raised interest rates by 850 basis points in the second half of 2023, including an unscheduled emergency hike in August when the ruble fell below 100 to the dollar and the Kremlin called for tighter monetary policy.
The inflation rate that the Russian Central Bank is most concerned about is 7.4% in 2023 and 11.9% in 2022. At 9.18% currently, economists expect it to be well above the central bank’s target of 4% this year.
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