Bank of Russia delivers another big rate hike to tame inflation

The Bank of Russia delivered its second 100 basis-point hike in interest rates this year and warned that monetary tightening isn’t over yet as a raft of factors from labor shortages to geopolitical tensions complicate its fight with inflation.

The central bank’s seventh straight increase took the key rate to 8.5%, in line with the expectations of the majority of economists in a Bloomberg survey. While its statement tweaked previous phrasing to cite the possibility of a single rate increase in coming meetings – rather than rate increases – Bank of Russia Governor Elvira Nabiullina suggested analysts shouldn’t read too much into this.

“The chance of several hikes is lower than it appeared in October,” Nabiullina said at her post-rates press conference. Still, “we leave open the possibility of a key-rate hike — possibly not just the one,” she said.

Inflation is running at double the central bank’s target, prompting President Vladimir Putin to step in and call on officials to get price growth back in line next year. Even after 425 basis points of hikes this year – one of the most aggressive tightening paths globally – inflationary pressures at home and abroad have driven price expectations to a record this month.

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“It’s a tough statement: they want to get inflation back to 4.0%-4.5% at the end of 2022, but at the same time they write that pressure from the labor market has increased,” said Natalia Orlova, chief economist at Alfa-Bank. “So the goal is too ambitious, and pro-inflationary risks are rising.”

The ruble traded down 0.2% against the dollar after Nabiullina’s press conference, while bond yields on 10-year debt were three basis points lower at 8.52%.

Wagers on higher rates have kept prices on Russian government debt under pressure and yields near their most elevated levels since late 2018. The ruble has benefited from the central bank’s tight policies – along with rising oil prices – becoming one of the best performers in emerging markets this year despite tensions over Ukraine.

What Our Economists Say:

“Inflation looks set to slow, but the central bank isn’t taking that for granted. The guidance remains hawkish, even though this could be the last hike of the cycle.”
–Scott Johnson, Bloomberg Economics

The Bank of Russia’s traditional mention of geopolitical tensions in its statement carried extra weight this month. Since policy makers’ last meeting, the threat of sweeping penalties from the U.S. and European Union has rushed back after a Russian troop build-up on the border with Ukraine sparked fears of an invasion, something Moscow has dismissed.

“Growing geopolitical tensions risk increasing volatility on the financial markets,” Nabiullina said.

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