Russia: Bank of Russia maintains rates at record high in December
Hold surprises markets: At its meeting on 20 December, the Central Bank of Russia (CBR) decided to maintain the key rate at 21.00%. This decision surprised most market analysts, who had priced in a hike, and followed October’s 200 basis point rise. As a result, the key rate has increased by a cumulative 1,350 basis points since the CBR started tightening its stance in July 2023 and remained at an all-time high as the year drew to a close.
Central Bank adopts wait-and-see approach: The Bank determined that credit conditions had tightened sharply since its last meeting in October and opted to wait for its effects to transmit through the economy, expecting this to translate into renewed disinflation. In addition, the CBR noted that price pressures eased on average in October–November from Q3 and forecasted this trend to continue. The Bank also pointed to signs that labor shortages might be easing—though the labor market remains tight—and highlighted a less upward-biased balance of risks to the inflation outlook. That said, core inflation and inflation expectations continued to climb through November, and high-frequency data suggests that domestic demand continues to outstrip supply capacity, dissuading the Bank from an interest rate cut.
Tightening cycle likely to have ended along with 2024: In its communiqué, the CBR maintained a hawkish tone, indicating that it will “assess the need for a key rate increase at its upcoming meeting”. In a subsequent statement, Governor Elvira Nabiullina ruled out a cut at its next meeting on 14 February and said that the Bank will need to retain a tight monetary policy stance for a long period to sustainably drive inflation toward its 4.0% target. Our Consensus is for the Bank to embark on a monetary policy easing cycle in 2025, with some panelists seeing cuts as soon as Q1.
Panelist insight: JPMorgan’s Anatoliy A. Shal commented:
“Although the door for further hikes was left open, we sense that the October hike was the last one in this cycle and, unless fiscal policy or credit activity surprise significantly, the next step will be a cut. Gauging the timing of the cut is not easy though. We suspect it will be aligned with first signs of meaningful softening in economic momentum, but the economy has so far proved surprisingly resilient to various shocks, including policy shocks. Our current forecast assumes the economy will stall by 2Q25 and this is when we expect the easing to commence. We think the economy will be flirting with recession at mid-year and anticipate that policy rate will be lowered to 14% by end-2025.”