Central Bank hikes rates to a record high in October

200 basis point hike surprises markets: At its meeting on 25 October, the Central Bank of the Russian Federation (CBR) decided to increase the key rate by 200 basis points to 21.00%. The decision, which followed September’s 100 basis point increase, surprised most market analysts on the upside and brought the key rate to a new all-time high. As a result, the key rate has increased by a cumulative 1,350 basis points since the CBR started its monetary policy tightening cycle in July 2023.

Overheating economy and sticky inflation expectations drive move: The Bank determined that further policy tightening is necessary to tame price pressures and reduce inflation expectations. Both headline and core inflation remained entrenched above the CBR’s 4.0% target through September, considerably outpacing the Bank's July forecast. Moreover, inflation expectations climbed to a year-to-date high in October among both households and firms. The Bank also underlined inflationary pressures stemming from additional planned fiscal spending and continued supply-side constraints driving domestic demand to outstrip supply—largely owing to a strained labor market amid military mobilization efforts, as well as robust growth in household incomes. Meanwhile, the CBR raised its inflation forecasts for 2024 and 2025 to 8.2–8.4% and 6.1–6.8%, respectively, compared to its July forecasts of 7.8–8.0% and 4.2–5.8%.

CBR leaves room for further tightening ahead: In its communiqué, the CBR struck a more hawkish tone, indicating that it “allows for the possibility of raising the key rate at its next meeting” and raising its forecast for the average policy rate in 2025 so as to drive inflation sustainably toward its 4.0% target. The Bank also noted that risks to the inflation outlook are “significantly tilted to the upside”. In a subsequent statement, Governor Elvira Nabiullina said that the Bank will need to retain a tighter-than-previously-expected monetary policy stance in 2025. In light of the CBR’s surprise hike, our panelists are likely to revise up their forecasts in the coming weeks. The Bank is scheduled to meet next on 20 December.

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