Russia Raises Key Rate to 10.5%

Russian central bank raised its benchmark one-week repo rate for the second straight meeting by 100 bps to 10.5 percent, aiming to fight inflation and support the ruble. Policymakers also cut growth forecasts sharply due to lower oil prices.

Excerpts from Information Notice of Bank of Russia:

On 11 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 10.5 percent per annum. In November — early December 2014 the upward movement of consumer prices kept on accelerating. Observed increase in inflation expectations and ruble depreciation expectations pose substantial inflation risks. The decision taken by the Bank of Russia is aimed at slowing consumer prices growth to the target of 4% in the medium run. In case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate.

In November — early December, inflation continued to accelerate. According to the estimates as of the 8 of December, annual consumer prices growth rate was equal to 9.4 percent. Core inflation rose to 8.9 percent in November 2014. Accelerated consumer prices growth is driven by ruble depreciation in the second half of 2014. External trade restrictions imposed in August 2014 also affected price dynamics. According to the Bank of Russia estimates, end of the year inflation will be around 10 percent. At the same time, the cumulative contribution of ruble depreciation, restrictions on imports and other factors specific for the markets of several food products, to year-to-year consumer prices growth will account for 4.9 percentage points by the year-end.

According to the Bank of Russia estimates, the annual GDP growth rate will amount to 0.6 percent in 2014. Due to the considerable change in the external conditions, the Bank of Russia revised its medium-term macroeconomic forecast. During the next three-year period, economic growth will be lower than previously projected in the baseline scenario due to persistently lower oil prices. Annual GDP growth is expected to be close to zero in 2015-2016. Amid persistently restricted access to the international capital markets for Russian companies and relatively cheap energy resources, fixed capital investments will continue to edge lower. Consumption will remain weak. 

Over the next months, prices for goods and services will continue to be affected by depreciation of the ruble. During the first quarter of 2015 inflation might be higher than 10 percent. Nevertheless, inflation and inflation expectations are forecasted to decrease as the impact of the exchange rate dynamics on prices exhausts and economy gradually adjusts to changing external trade conditions and imposed restrictions on imports. 

In case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate. Should inflation and inflation expectations show a stable downward trend, the Bank of Russia will be ready to start monetary policy easing.

Russia Raises Key Rate to 10.5%

Central Bank of the Russian Federation | Joana Taborda |
12/11/2014 10:53:05 AM