The Russian central financial institution surprises the markets by retaining the important thing rate of interest at 21%

MOSCOW, Russia: Russia's central bank has cut its key interest rate by 300 basis points for the third time since its emergency hike in late February, citing a slowing in inflation and a recovery in the ruble.

KIRILL Kudryavtsev | AFP | Getty Images

The Russian central bank unexpectedly left its key interest rate unchanged at 21% on Friday, citing improved monetary policy that has created the conditions for containing rapid inflation.

“Monetary conditions have tightened more significantly than anticipated in the October policy rate decision,” the bank said, citing factors “independent” of its monetary policy.

“In view of the significant increase in interest rates for borrowers and the cooling of credit activity, the tightening of monetary conditions achieved creates the necessary conditions for resuming disinflation processes and returning inflation to the target level, despite the increased current price growth and high domestic demand.” it added.

Markets had widely expected the central bank to raise interest rates by another 200% on Friday, after making such a move in October amid ongoing efforts to curb inflation caused by the military costs of Moscow's invasion of Ukraine and Exports were fueled by Western sanctions against their most important raw material.

The bank said on Friday it would consider the need for a rate hike at its upcoming meeting in February. It currently forecasts that annual inflation will fall to 4% in 2026 and will remain at this target in the future.

Russia's consumer price index is currently more than double that rate – annual inflation reached 9.5% on December 16, the bank said on Friday, pointing to ongoing pressures, particularly in the household and corporate sectors. The consumer price index reached 8.9% on an annual basis in November, compared to 8.5% in October. The increase was largely due to rising food prices, with the cost of milk and dairy products rising sharply this year.

Inflation an “alarming signal”

Maintaining interest rates also came after Russian President Vladimir Putin admitted during his annual question-and-answer session with Russian citizens on Thursday that the country's inflation was problematic and that there were signs the economy was overheating. Nevertheless, he emphasized that Russia could still achieve economic growth of 3.9 to 4 percent this year.

“Of course inflation is such an alarming signal. Just yesterday, as I was preparing for today's event, I spoke with the Chair of the Central Bank, Elvira [Nabiullina] who told me it was already at about 9.3%. But wages have increased by 9% in real terms, I would like to emphasize – in real terms minus inflation – and the population's disposable income has also increased,” he said, according to comments reported by Interfax and translated by Google.

The International Monetary Fund forecasts Russia will post growth of 3.6% this year before slowing to 1.3% in 2025.

The “sharp slowdown,” the IMF said, is due to “private consumption and investment slowing amid tighter labor markets and slower wage growth.”

“What we are currently seeing in the Russian economy [is] that it is addressing capacity constraints,” said Alfred Kammer, director of the IMF’s European department, when the fund released its latest economic outlook in October.

“So we have a positive output gap, or you could put it another way – the Russian economy is overheating. What we expect next year is simply the impact that if you exceed supply capacity you won't be able to maintain it for very long. So we. “I see an impact there of moving towards more normal territory, and that is of course supported by tight monetary policy from the Russian central bank,” he said.

“Tight monetary policy to reduce inflation slows aggregate demand and will have this impact on GDP in 2025. That is why we are seeing the slowdown in 2025,” Kammer added.