Russia raises key rate to 6.5% in sharpest move since 2014

Russia’s central bank increased its key interest rate to 6.5% on Friday to curb stubbornly high inflation and indicated that further rate increases were possible even after the 100 basis point hike, its sharpest since late 2014.

After slashing rates to a record low of 4.25% amid the COVID-19 pandemic in 2020, Russia this year embarked on a monetary tightening cycle to rein in inflation, which is a sensitive issue ahead of September parliamentary election.

Central Bank Governor Elvira Nabiullina, presenting the rate move, said the bank also considered 50 and 75-basis-point hikes but opted for a more aggressive move to pull inflation back to its 4% target.

Friday’s decision, the fourth rate increase this year, came after annual consumer inflation, the central bank’s main area of responsibility, overshot expectations and accelerated to 6.5% in June, its highest since August 2016 when the key rate was 10.5%.

“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of (a) further key rate increase at its upcoming meetings,” the central bank said in a statement.

The central bank said inflation will finish this year at 5.7-6.2% returning to 4.0-4.5% in 2022. The bank also revised its economic forecasts and now expects the economy to grow by 4.0-4.5% in 2021 versus an earlier projection of 3-4% growth.

Nabiullina said the bank’s tighter monetary policy would not hamper economic growth.

The decision to raise the rate from 5.5% (RUCBIR=ECI) was in line with the forecast. The Bank of Russia had raised rates by 50 basis points last month.

High inflation eats into living standards and has been a major concern among households ahead of parliamentary elections in which the ruling United Russia party is widely expected to retain its dominance.

Higher rates help tame consumer inflation by making borrowing more expensive and saving more attractive, while also supporting the rouble by buttressing demand for Russia’s high-yielding assets.

SovComBank, Sova Capital and ING said another 25-basis-point increase in the key rate to 6.75% looked possible at the next board meeting on Sept. 10.