Russia: Central Bank continues tightening cycle in September
Move surprises markets: At its meeting on 13 September, the Central Bank of the Russian Federation (CBR) decided to hike the key rate by 100 basis points to 19.00%. The decision, which followed July’s 200 basis point increase, surprised most market analysts, who had expected a hold. As a result, the key rate has increased by a cumulative 1,150 basis points since the CBR started its monetary policy tightening cycle in July 2023.
Tight policy needed to combat overheated economy: The Bank determined that further hikes were required to drive inflation toward its 4.0% target. Despite price pressures having slowed somewhat in the third quarter, the CBR assessed that disinflation was slower than it had forecast in its last meeting and inflation expectations among both households and firms had continued to rise. Meanwhile, with regards to the economy, policymakers attributed the recent slowdown in GDP growth to supply-side constraints as domestic demand still outstrips supply—largely owing to a strained labor market amid military mobilization efforts, as well as robust growth in household incomes—factors which the CBR sees as fanning price pressures.
Further hikes on the horizon: In its communiqué, the CBR struck a more hawkish tone, indicating that it “holds open the prospect of increasing the key rate at its upcoming meeting” on 25 October as risks to the inflation outlook are “significantly tilted to the upside”. In a subsequent statement, Governor Elvira Nabiullina also stated that the Bank stood ready to keep rates tight for as long as necessary until inflation returned to its 4.0% target. Accordingly, a majority of our panelists have penciled in another 100 basis points of hikes this year, with others expecting the CBR to hold through year-end.
Panelist insight: Goldman Sachs’ Clemens Grafe holds a more dovish view:
“We forecast the Bank to stay on hold till year end, but the risks are tilted to the upside. Our inflation forecast remains above that of the Bank and, with the Bank maintaining a hiking bias, a further tightening cannot be ruled out. However, we also see the economy slowing more quickly than consensus expectations and we think that the Bank will ultimately accept a slower adjustment path of inflation given the constraints imposed by the continuing conflict in Ukraine.”