The Russian central financial institution raises the important thing rate of interest to 21% to curb higher-than-forecast inflation

June 9, 2024, Russia, Moscow: In the center of the capital there is a Kremlin guardhouse (l.) and the Foreign Ministry (m., background). Photo: Ulf Mauder/dpa (Photo by Ulf Mauder/picture Alliance via Getty Images)

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The Russian central bank raised its key interest rate by 200 basis points to 21% on Friday, citing consumer price increases well above its forecast and warning of persistently high inflation risks in the medium term.

The key interest rate was raised by 100 basis points to 19% in September.

Friday's move exceeds the 100 basis point increase expected by analysts and takes the institute's key interest rate to its highest level since February 2003, according to Reuters. It was last at a similar level in February 2022, when Russian politicians raised it a few days after Moscow's invasion of in neighboring Ukraine to 20% to calm local markets.

The bank struck a hawkish tone on Friday regarding further policy moves. In a briefing after the decision, Russian Central Bank Governor Elvira Nabiullina said that the institution's board had considered raising the key interest rate to above 21%, leaving open the possibility of further increases at the next meeting in December, according to from Google translated comments Posted by Russian state news agency Tass.

It found that annual seasonally adjusted inflation averaged 9.8% in September, up from 7.5% in August. Pressure is now expected to be in the range of 8.0-8.5% by the end of 2024 – “well above” a July forecast of around 6.5-7.0%.

“In the medium term, the balance of inflation risks is still trending significantly upwards,” the bank said in a statement. “The main risks are associated with persistently high inflation expectations and the upward deviation of the Russian economy from a balanced growth path, as well as a deterioration in foreign trade conditions.”

The bank expects annual inflation to fall to 4.5-5.0% in 2025 and 4.0% in 2026.

Russia's economy has been hit by low world prices for its key oil exports and by Western sanctions that restricted trade to deplete Moscow's coffers for the war in Ukraine and contributed to the ruble's decline. The U.S. dollar was up 0.36% against the ruble at 12:52 p.m. London time.

Russia's interest rate hikes – coming at a time when the European Central Bank and the US Federal Reserve are taking steps to ease monetary policy – have raised concerns about a possible slowdown in the country's economic growth.

The International Monetary Fund forecasts that inflation in Russia will average 7.9% this year, noting in its October World Economic Outlook that the country's GDP will fall to 1.3% from 3.6% this year. will fall in 2025 “as private consumption and investment decline due to fewer shortages in the year”. the labor market and slower wage growth.”