MOSCOW (Reuters) – Russia’s central bank held its key interest rate at 7.5% as expected on Friday, but issued a more hawkish signal in warning of growing inflation pressure and promising to keep rate hikes on the table at upcoming meetings.
Annual inflation, which spiked to over 20-year highs in 2022, has slowed to below the bank’s 4% target in recent months as last year’s base effect took hold. But it is expected to pick up, with consumer prices rising 0.21% in the week to June 5.
Friday’s decision to hold the rate at current levels was in line with a Reuters poll and analysts had said that Wednesday’s inflation data could lead the bank to issue a tighter signal.
The Bank of Russia forecasts year-end inflation at 4.5-6.5% in 2023, returning to the 4% target in 2024.
“Given gradually rising inflationary pressures, the Bank of Russia holds open the prospect of increasing the key rate at its next meetings to stabilise inflation close to 4% in 2024 and further on,” the central bank said in a statement.
In a series of rate cuts last year, the bank gradually reversed an emergency hike that took the rate to 20% in late February 2022. That jump followed Russia’s launch of what it calls its “special military operation” in Ukraine, and the imposition of wide-ranging Western sanctions in response.
The central bank has now held rates steady at 7.5% for six meetings in a row since the last cut in September.
INFLATION PRESSURE
The bank has maintained a hawkish stance this year, unable to find room to ease monetary policy. On Friday it said the overall balance of inflation risks has “tilted even more to the upside”.
“Accelerating fiscal spending, deteriorating terms of foreign trade and the situation in the labour market remain pro-inflationary risk drivers,” the bank said.
The central bank had turned its hawkish rhetoric up a notch, said Liam Peach, Senior Emerging Markets Economist at Capital Economics, describing the bank’s signal as “the strongest signal yet that policy tightening is in the pipeline”.
Inflation risks such as a weakening rouble, rapid wage growth and a recovery in consumer demand have picked up since the last meeting in late April, said Mikhail Vasilyev, chief analyst at Sovcombank.
Russia’s budget spending is well above plan this year, pushing the deficit to $42 billion for January-May, data showed this week. Further budget deficit expansion could require tighter monetary policy, the bank said.
Central Bank Governor Elvira Nabiullina was due to give a media briefing at 1200 GMT.
The next rate-setting meeting is scheduled for July 21.
(Reporting by Reuters; Writing by Alexander Marrow; Editing by Andrew Osborn, Mark Trevelyan and Nick Macfie)
