Russia: the Central Bank raises its key rate to 8.5%

2023-07-21 14:59:53

The Central Bank of Russia (BCR) announced on Friday July 21 an increase in its key rate by one point, to 8.5%. “Domestic demand trends and the depreciation of the ruble since the beginning of 2023 significantly amplify the inflationary risk,” said the BCR in a statement, which had not taken such action for almost a year.

Despite everything, the Central Bank maintains its objective of bringing inflation down to 4% in 2024, when it should reach, according to its forecasts, between 5% and 6.5% at the end of 2023. Its decision to raise its key rate is in line with the expectations of analysts, who said they had been betting for several days on an increase of between 0.25 and 1 percentage point.

Thanks to relatively stable macroeconomic indicators, the key rate had nevertheless remained for several months at the level announced last September (7.5%), far from the peak reached just after the launch of the invasion of Ukraine, at the end of February 2022. In the wake of the first international sanctions, the BCR had drastically raised its rate to 20% before proceeding with several cuts, reassured by the resilience of the Russian economy.

Ruble erosion

But in recent weeks, the erosion of the ruble – which was trading this Friday morning at 100.3 rubles for one euro – pushed the BCR to act to avoid seeing inflation flare up again, like last year when the rise in prices reached 17.8% in April. According to observers, the weakening of the ruble is explained in particular by an oil price which remains relatively low, despite the decisions of OPEC + aimed at limiting world production.

The first vice-president of the BCR, Ksenia Yudayeva, had affirmed at the beginning of July that the current dynamics of the exchange rate were, according to her, linked to “the fall in export earnings”. Russia has been targeted by an unprecedented wave of international sanctions after the launch of its offensive in Ukraine. In a sign that these sanctions are weighing on the national economy, Russia’s gross domestic product contracted by 1.9% in the first quarter, according to Rosstat. And the national deficit could reach between 3% and 4% by the end of the year, according to experts. That is a higher level than the expected 2%.

Faced with the acceleration of federal spending, largely linked to the intervention in Ukraine, the Ministry of Finance already announced budget cuts for 2024 on Wednesday of 450 billion rubles (4.4 billion euros).