Russian central bank increases interest rate to 16%

The Bank of Russia on Friday raised the key interest rate by 100 basis points to 16% per annum, explaining that current inflationary pressures remain high. It’s the fifth rate hike in a row since summer, when the basis was at 7.5%.

Inflationary pressures have increased in recent months, due to domestic demand exceeding the economy’s capacity to produce goods and services to meet it. The pressure has exceeded the Bank of Russia's previous estimates, according to the regulator's statement.

Given the monetary policy stance, annual inflation in Russia will decline to 4%-4.5% in 2024 and stay close to 4% going forward from there, the central bank projected.

It further added that GDP growth in the third quarter of 2023 and recent monthly data for the final quarter show that economic activity is increasing much faster than the Bank of Russia expected in October. “This suggests that the upward deviation of the Russian economy from a balanced growth path in the second half of the year has proved to be more substantial.” The Bank of Russia expects GDP growth in 2023 to outperform its October forecast and exceed 3%.

The regulator also noted that growth in consumer activity is propelled by rising real wages and lending. “Significantly increased profits of companies and positive business sentiment, including due to fiscal stimulus, support high investment demand,” the central bank said.

The return of inflation to target in 2024 and its further stabilization close to 4% assume that tight monetary conditions will be maintained in the economy for a long period, according to the statement.

The Bank of Russia will hold its next key rate review meeting in February.

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