Russia Surprises With Rate Hike, Signals More to Come

The Bank of Russia increased interest rates for the first time since 2018 and said further hikes are likely after inflation accelerated faster than expected.

The benchmark rate was raised 25 basis points to 4.5% on Friday. Just three analysts in a Bloomberg survey of 41 economists forecast the move, with the rest predicting a hold. Bloomberg reported earlier this week that the rate could be raised to 5.5% by the end of the year.

The central bank considered a bigger increase on Friday, but decided that policy changes should be gradual, Governor Elvira Nabiullina, who was wearing a brooch in the shape of a hawk, said at a news briefing after the decision.

“Time is of the essence,” she said. “If you postpone a rate hike, inflation may accelerate and inflation expectations won’t decrease. This will move inflation further from the target and that will require a more significant rate hike in the future.”

The ruble climbed and 10-year bond yields rose to their highest level in a year.

Russia Surprises With Rate Hike, Signals More to Come

The move follows big hikes in Brazil and Turkey this week, highlighting how inflation and rising Treasury yields are becoming a problem across emerging markets. In Russia, food prices in particular have shot up, adding to a decline in living standards during the pandemic.

“I think another 25 basis-point hike is coming in April or June, but April is a bit more likely,” said Tatiana Orlova, an analyst at Emerginomics in London, who correctly forecast Friday’s decision. “Then the central bank might take a pause to take stock of the impact of the hikes on the economy.”

Annual inflation accelerated 5.8% as of March 15, the fastest pace in more than four years, but the central bank expects it to peak this month, according to the statement. Inflation is running above forecast and is expected to return close to the target of 4% in the first half of 2022, it said.

A return to neutral policy, which would imply a rate of 5%-6%, could be reached this year, but it’s not a given, Nabiullina said.

What Our Economists Say:

“The central bank’s next move depends on the data, but this tightening cycle is likely to be front loaded to contain inflation. Two more hikes in April and June would provide room to maneuver in the second half of the year.”

-- Scott Johnson, Bloomberg Economics. Here’s the full INSIGHT

A government plan to increase spending in the first half of the year to help revive the economy from the pandemic may also propel inflation. Growth is recovering quicker than expected and will be supported by the improved global outlook, the central bank said.

The threat of new U.S. sanctions has clouded the outlook for the ruble, which could add new inflationary pressures in coming months. Relations between Russia and the U.S. reached a new low this week after U.S. President Joe Biden vowed to make the Kremlin “pay a price” for election interference.

Nabiullina downplayed the risk of penalties on ruble sovereign bonds, a measure being considered in Washington, saying it wouldn’t create a systemic risk because the level of outstanding debt is low. The move could cause short-term liquidity problems, she added.

“The surprising rate hike not only reflects concerns about inflation, but also about the rising risk that the U.S. may impose another round of sanctions,” said Piotr Matys, a strategist at Rabobank in Moscow. “The main objective is to provide the ruble with support.”

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