Russian Central Bank Defies Predictions with Surprise Rate Hold at 21% Amid Inflation Woes
1min read In an unexpected move, the Russian Central Bank on December 20 announced it would maintain its key interest rate at 21%, defying market expectations of a 200 basis points hike. Even Russian President Vladimir Putin acknowledged the concerning inflationary situation, making the central bank's decision particularly surprising.
The Central Bank of Russia cited ongoing inflationary pressures, exacerbated by the recent depreciation of the ruble, forecasting that inflation could hit 9.5% in 2024. The bank, however, views its earlier rate increase in October, which was also to 21%, as having adequately cooled credit activity. This, they believe, lays the groundwork for a reduction in inflation, aligning with their goal to bring inflation down to 4% by 2026.
Meeting again on February 14, 2025, the central bank will reassess the credit and inflation landscapes to decide on any rate adjustments. Meanwhile, the November consumer price index in Russia rose by 8.9% year-over-year, with surging food prices as a primary driver. The impending increase in military spending by 2025 suggests that inflationary pressures will remain persistent.
Earlier, President Putin remarked that although Russia's economic growth was stable, inflationary overheating was a concern. He attributed rising prices partly to international sanctions, which have caused significant increases in essential food items' costs. He emphasized that the government's role, along with the central bank, was to achieve a "soft landing" for the economy.
Observers of Russia's financial scene noted that the pause in rate hikes implied significant autonomy for the central bank, yet mounting pressure from the business community could not be ignored. Influential business figures have previously lamented that soaring interest rates were hampering investment activities. According to economist Evgeny Kogan, this pressure contributed to the central bank's decision to halt further rate hikes, putting the key interest rate at its highest during Putin's tenure.
Central Bank Governor Elvira Nabiullina acknowledged that high interest rates and ongoing monetary tightening attract criticism. However, the bank’s policy decisions are made based on thorough evaluations and forecasts of the economic environment. Despite the current rate decisions, Nabiullina warned of heightened geopolitical pressures that could further strain the Russian economy.
Amid these economic maneuvers, the International Monetary Fund (IMF) anticipates Russia's economic growth to reach 3.6% this year but predicts a slowdown to 1.3% by 2025, driven by easing labor market tensions and decelerated wage growth impacting private consumption and investment.
