The Central Bank of Russia raised its key rate on Friday by 200 basis points, more than expected, to 15%. This was the fourth time in a row that it had increased borrowing costs due to the weakening rouble and persistent inflation pressure.

Since July, the Central Bank has raised rates by 750 basis points. This includes an emergency rate hike that was unplanned in August when the rouble slid past 100 dollars, and the Kremlin demanded tighter monetary policies.

The Bank of Russia said that the current inflationary pressures are significantly higher than the Bank’s expectations. It cited the domestic demand exceeding the supply of goods and services and the high growth in lending.

The Bank also called attention to the increasing government expenditures as Russia invests more fiscal resources in the defense sector and increases the production of military equipment to pursue what it calls “its special military operation” (military intervention) in Ukraine.

The Bank stated that “the updated medium-term fiscal parameters assume a slower decline than expected in fiscal stimuli in the years to come.”

The government also admitted for the first time that it might not be able to return inflation to its target of 4% next year. It forecasts year-end inflation in 2024 between 4-4.5%.

Reuters polled and found that the majority expected a modest increase of 14%. After the announcement, the rouble soared to its highest level in six weeks against the dollar.

TIGHTENINGS WITH FRONT-LOADED LOADING

This summer, the central Bank began its tightening cycle when the fall of the rouble compounded the inflationary pressures from the tight labor market and strong consumer demand.

After Moscow’s troops invaded Ukraine in February 2022, the West imposed sweeping sanctions. The rates were cut to 7.5% as recently as this year.

In 2023, the Central Bank predicted that inflation would range between 7.0 and 7.5%. The central Bank had forecasted year-end inflation of 6.0-7.0%. As of October 16, the annual inflation rate was 6.38%.

The Bank maintained a hawkish position, saying that tight monetary policy would continue for a very long time, but retracted its guidance that it would examine the need for additional hikes.

Capital Economics’ Liam Peach is a senior emerging market economist. He said, “It appears that today’s rate hike has front-loaded tightening cycles in response to fiscal announcements made earlier this month.”

Elvira Nabiullina, the Central Bank Governor, was scheduled to brief the media at 1200 GMT about the Bank’s policy and forecasts.

The next rate-setting session is scheduled for December 15.

Reporting in Moscow by Elena Fabrichnaya and Alexander Marrow; editing by Gareth Jones and Mark Trevelyan.

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