Russia lifts interest rates amid rising inflation, geopolitical risks

FILE PHOTO: Russian Central Bank Governor Nabiullina speaks during an interview in Moscow
FILE PHOTO: Elvira Nabiullina, Governor of Russian Central Bank, speaks during an interview in Moscow, Russia June 27, 2019. REUTERS/Evgenia Novozhenina

March 19, 2021

By Andrey Ostroukh

MOSCOW (Reuters) – Russia’s central bank raised its key interest rate to 4.5% on Friday, embarking on a monetary tightening cycle triggered by a weaker rouble that pushed inflation higher and geopolitical risks that stirred market turmoil.

Russia raised its key rate by 25 basis points, the first change since it cut the rate in July 2020 to a record low of 4.25% as the economy was rocked by the plunge in crude prices, the country’s main export. The coronavirus pandemic has buffeted the economy, which is on track to rebound this year.

“The economy is recovering with a greater confidence … while inflationary pressure and inflationary risks have increased,” Central Bank Governor Elvira Nabiullina said as she explained the rate decision.

“In these conditions, we are starting to return to the neutral monetary policy,” Nabiullina said, confirming the neutral rate range at 5%-6%.

The decision to raise the rate was at odds with a Reuters poll that forecast Russia would keep the cost of lending steady before raising it later this year.

The central bank said the economy was expected to recover to pre-pandemic levels before the end of 2021, saying it “holds open the prospect of further increases in the key rate at its upcoming meetings.”

ING Bank analysts said “a further 25-basis-point hike on 23 April appears to be a done deal.”

“We think that there will a 25-basis-point rate hike in April and June, with additional tightening later this year taking the policy rate to 5.25% by year-end,” Capital Economics said.

The central bank’s move follows a recent depreciation in the rouble that was driven by fears of U.S. sanctions on Russia. It was in line with rate moves by central banks in Brazil and Turkey this week.

“Short-term pro-inflationary risks are also connected with stronger volatility in global markets, driven by various geopolitical developments, among other factors,” Russia’s central bank said.

Annual inflation, the central bank’s main focus, had spiked to 5.8% as of mid-March and is only expected to slow to the central bank’s 4% target in the first half of 2022, later than previously expected, the bank said.

(Additional reporting Gabrielle Tétrault-Farber, Elena Fabrichnaya, Alexander Marrow, Maria Kiselyova, Katya Golubkova, Darya Korsunskaya, Anastasia Lyrchikova and Oksana Kobzeva; Editing by Paul Simao)