Bank of Russia Expected to Deliver Big Rate Hike
Bank of Russia Governor Elvira Nabiullina is expected to deliver another big increase in the key interest rate Friday as inflation remains double the central bank’s target.
A substantial majority of economists in a Bloomberg survey expect a 100 basis-point increase, the second hike of that size this year, after Nabiullina said the bank’s board would consider a move that large at its meeting. Inflation expectations jumped to the highest level since early 2016, the central bank said Thursday.
“The surprising jump of inflation expectations to a new record in December will be an important factor for the central bank,” said Olga Belenkaya, economist at Investment Co. Finam in Moscow. “A 100 basis-point increase is already included in the market expectation, what’s more important is the signal for the upcoming meetings.”
The central bank has already raised its key rate by 325 basis points this year, making it one of the most aggressive in the world in tightening credit. But inflation remains more than double its 4% target.
Highlighting inflation as a major problem, President Vladimir Putin earlier this month called for steps to bring it back to target next year.
What Our Economists Say:
“Glimmers of relief in the data will temper inflation concerns, just not enough to deter another big rate hike, especially with inflation expectations jumping. We see a full percentage point of tightening, though the guidance could be less hawkish.”
--Scott Johnson, Bloomberg Economics, (latest report)
So far, the central bank says it expects inflation to fall back to 4-4.5% by the end of 2022, but some economists warn that price growth could remain elevated for longer.
The expectations of higher rates have kept prices on Russian government bonds under pressure, with yields near the highest since late 2018. A hawkish signal Friday could trigger further sales. The ruble, meanwhile, 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 fears of new sanctions amid the conflict over Ukraine.
The U.S. Fed’s signal for tighter monetary policy adds pressure on emerging markets like Russia to raise rates more in order to prevent weakening currencies from further stoking inflation.
“There is a chance that if this increase is 100 basis points, then it would be the last one,” said Irina Lebedeva, an economist at Uralsib Bank in Moscow.
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