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1. Background Information

Date: October 25, 2024

Action: The Central Bank of Russia announced an increase in the key interest rate from 19% to 21%, a 200 basis point hike.

Expectation: Most analysts in a previous Reuters survey had expected a 100 basis point hike.

2. Policy Statement from the Central Bank of Russia

Inflation Pressures: The Central Bank of Russia stated that high inflation expectations have intensified the inertia of underlying inflation, necessitating further tightening of monetary policy to ensure a return to target inflation levels and reduce inflation expectations.

Fiscal Spending: Additional fiscal spending in 2024 and the associated expansion of the federal budget deficit will have inflationary implications.

Supply and Demand Imbalance: The growth in domestic demand has significantly exceeded the capacity to expand the supply of goods and services.

3. Inflation Expectations

End-2024 Inflation: Inflation is expected to reach 8%-8.5% by the end of 2024, up from the previous expectation of 6.5%-7%.Inflation in 2025: It is projected that the inflation rate in 2025 will be between 4.5% and 5.0% (previously forecasted at 4.0% to 4.5%).

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Inflation in 2026: It is anticipated that the CPI will reach the target of 4% in 2026.

4. Interest Rate Expectations

Benchmark Interest Rate for 2024: It is expected that the benchmark interest rate will reach 17.5% in 2024 (forecast range of 16.9% to 17.4%).

Benchmark Interest Rate for 2025: It is anticipated that by 2025, the benchmark interest rate will be within the range of 17.0% to 20.0% (previously forecasted at 14.0% to 16.0%).

5. Comments from the Central Bank Governor

Inflation Not Slowing Down: The Central Bank of Russia's Governor, Elvira Nabiullina, stated that inflation has not slowed down, and significant monetary policy tightening will be required in 2025.

Global Economic Slowdown: The ongoing slowdown in the global economy implies a reduced demand for Russian exports.

Inflation Target: Committed to the 4% inflation target, and a more conservative approach is needed when addressing inflation risks.

6. Analysis and ImpactInflation Pressure: The primary reason for the Central Bank of Russia's interest rate hike is to counteract high inflationary pressures. Current inflation expectations are significantly higher than the target level, necessitating the central bank to raise interest rates to curb inflation.

Fiscal Policy: Additional fiscal expenditures and an expansion of the budget deficit exacerbate inflationary pressures, requiring the central bank to offset these effects through interest rate hikes.

Supply and Demand Imbalance: Rapid growth in domestic demand coupled with insufficient supply capacity leads to rising prices. Interest rate hikes can suppress excessive demand and alleviate the supply and demand imbalance.

Market Expectations: The magnitude of the interest rate hike exceeded market expectations, indicating the central bank's high level of concern about the current inflation situation. The market may react to this move with currency appreciation and capital inflows, among other responses.

Economic Impact: Interest rate hikes may suppress economic growth, particularly in industries sensitive to borrowing costs, such as real estate and manufacturing. However, in the long term, controlling inflation aids in the stable development of the economy.

7. Conclusion

The Central Bank of Russia's interest rate hike reflects its high level of concern regarding the current high inflationary pressures. By significantly raising interest rates, the central bank aims to suppress inflation expectations, control price increases, and ensure long-term economic stability. However, this move may also have certain negative impacts on economic growth, necessitating a balance between controlling inflation and promoting growth.