Russia Considers Faster Rate Hikes This Year as Inflation Spikes

(Bloomberg) -- The Bank of Russia is considering moving faster than previously signaled to tighten monetary policy and may bring its key interest rate up by 125 basis points or more before the end of the year, according to a person with knowledge of the discussions.

A surge in inflation and concerns about government plans to increase spending mean the central bank may raise the rate in several steps to 5.5% or possibly even 6% -- though that’s currently seen as less likely -- by the end of the year, the person said, speaking on condition of anonymity to discuss deliberations that aren’t public. The rate now stands at a record low of 4.25%.

Such a fast move to tighten monetary policy would represent a dramatic shift for the central bank, which until recently had said its posture would remain accommodative into 2022 in order to sustain the economic recovery. Economists expect no more than 50 basis points of hikes this year, according to Bloomberg surveys.

The ruble rose past 73 per dollar for the first time since December after the news, slipping a bit later to trade at 73.0925 at 4:31 p.m. in Moscow. Forward-rate agreements showed 52 basis points of tightening over the next three months, the most in a year.

Sberbank CIB, TS Lombard and Sovcombank issued reports Monday forecasting a hike at Friday’s Bank of Russia meeting, but the majority of economists continue to see no change.

Read More: Bank of Russia’s Hawkish Hold on Rates Won’t Last Much Longer

Inflation exceeded forecasts in February, with higher food prices and a weak ruble helping push the rate to 5.7%, well beyond the central bank’s 4% target. Economic growth was stronger than expected after Russia avoided a lockdown at the end of 2020. The central bank is also concerned the government will boost spending this year, releasing cash earlier than expected and fueling price pressures, according to the person.

The Bank of Russia didn’t respond to an email seeking comment on rate discussions. The central bank is currently in a self-imposed quiet period where it doesn’t comment on monetary policy ahead of Friday’s meeting.

Market Pressure

Nabiullina is in line to be among of the first central bankers globally to tighten policy in the months ahead.

Since the latest inflation numbers were released, derivatives traders more than tripled their expectations for interest-rate increases in the coming three months. Ten-year ruble bond yields are testing their highest levels in a year.

“The market is forcing its short-term concerns on the central bank, which will struggle to ignore it,” said Viktor Szabo, who helps manage $560 billion at Aberdeen asset management in London. The first hike could come as early as Friday’s meeting, he said, but April is more likely and will depend on revised data for gross domestic product growth, due at the start of the month.

What Our Economists Say:

“The Bank of Russia’s tightening cycle has effectively begun, with the hawkish guidance shifting expectations. Whether a first move comes Friday or not until April, a rate hike sounds imminent, and more importantly the pace this year could be steep.”

-- Scott Johnson, Bloomberg Economics

As the global economy recovers from the pandemic and developed-market investors guess at the potential scope of price pressure, inflation is picking up in some emerging nations, making a more hawkish policy response all but inevitable. Turkey and Brazil are forecast to lift rates on Thursday and South Africa and the Czech Republic are seen following suit later this year.

In an interview with local media on Friday, Nabiullina said the bank may shift as soon as this year to a neutral policy -- one that neither stokes nor slows inflation -- implying at least 75 basis points of hikes.

©2021 Bloomberg L.P.