The Central Bank raised its key rate for the fifth time in a row

The Board of Directors of the Bank of Russia at its meeting today raised the key rate by 0.25 percentage points to 6.75% per annum, the press service of the regulator said. Thus, the indicator is now at its highest level since October 2019. Then it was 7%, after which, on October 25, it was immediately reduced to 6.5% per annum.

“If the situation develops in accordance with the baseline forecast, the Bank of Russia admits the possibility of further increases in the key rate at the next meetings. Decisions on the key rate will be made taking into account the actual and expected dynamics of inflation in relation to the target, the development of the economy over the forecast horizon, as well as the assessment of risks from internal and external conditions and the reaction of financial markets to them, ”the regulator said in a press release.

The Central Bank raised its key rate for the fifth meeting in a row. From July 24, 2020 to March 19, 2021, it was at a historically low level of 4.25% per annum. This was a consequence of the soft monetary policy (MP), which the regulator switched to due to the coronavirus pandemic. It was necessary to stimulate demand in the country against the backdrop of restrictive measures.

However, after at the end of last year, inflation in the country began to grow above the target of 4%, and inflationary expectations of the population began to rise (in April they reached their maximum since February 2017, 11.9%), the Central Bank began to raise the key rate. He did so for the first time on March 19, increasing the rate to 4.5% per annum. Previously, the regulator took such a step only in December 2018.

On April 23, for the first time since December 2014, the Central Bank raised its key rate by 0.5 percentage points to 5% per annum. On June 11, the regulator’s board of directors did the same, and on July 23, for the first time since the end of 2014, it increased the indicator by 1 percentage point at once. Thus, the rate reached the level of December 2019 – 6.5% per annum. It also meant the end of the regulator’s soft monetary policy.

At a press conference on July 23, Central Bank Chairman Elvira Nabiullina admitted that the cycle of raising the key rate is over. She explained then that the conditions under which the monetary policy will no longer be tightened are the reduction of inflation and inflationary expectations of the population. However, according to Rosstat data presented on September 8, annual inflation in Russia in August broke a five-year record, reaching 6.68%. This value was higher only in August 2016. Inflationary expectations of the population (the median estimate of inflation expected by citizens in the next 12 months) slightly decreased from a record 13.4% since November 2016, recorded in July, and amounted to 12.5%. However, this indicator is still “near multi-year highs”, noted in the Central Bank.

Against this background, the regulator’s board of directors decided to raise the key rate for the fifth time. This decision did not come as a surprise to analysts. From the consensus forecast, previously compiled by Vedomosti, it followed that 12 out of 23 surveyed experts believed that the Central Bank would increase the indicator to 7% per annum. Seven analysts were in favor of a 0.25 pp increase. The other four found it difficult to name the exact size of the regulator step and reported that the increase could be 0.25–0.5 p.p.

The increase in the key rate of the Central Bank is aimed at reducing inflation to a target of 4%. According to the latest medium-term forecast of the regulator, published at the end of July, by the end of this year it will be in the range of 5.7-6.2%. Inflation will return to the target only in 2022, according to the Central Bank. The next key rate meeting is scheduled for October 22nd.

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