Russia to Raise Rates Again as Prices Spike: Decision Day Guide

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The Bank of Russia is likely to deliver a fifth straight increase in its key rate Friday, with inflation running well above target.

The annual increase in consumer prices hit 6.7% last month, the highest level in five years, above both the central bank’s 6.5% benchmark rate and its 4% inflation goal. 

“Much-faster-than-expected acceleration in inflation shifted the bias in favor of the central bank raising the policy rate by at least 50 basis points,” said Piotr Matys, a senior currency analyst at InTouch Capital Markets Ltd. “The central bank may have to maintain a relatively hawkish tone and may suggest that the terminal rate could be above 7% to have more room for maneuver should inflation remain higher for longer.”

Investors’ expectations of a bigger hike sapped demand at Wednesday’s weekly government-bond auction. Twenty six economists expect a 50 basis-point rate hike, while sixteen forecast a smaller move and one sees no change, according to a Bloomberg survey. 

Along with Brazil, the Bank of Russia has been among the most aggressive emerging-market central banks in raising rates to control inflation this year. Turkey has taken a more cautious approach, even as price growth has spiked.

Russia’s central bank has already raised rates 225 basis points this year but inflation, powered both by global and domestic factors, isn’t slowing down. At the last rate-setting meeting in July, Governor Elvira Nabiullina warned that inflationary expectations could continue to rise, triggering a self-reinforcing spiral.

What Our Economists Say:

“Another big rate hike could turn out to be the last of the cycle, but the central bank probably won’t say so explicitly. Uncertainty in the data is likely to keep the signal relatively hawkish.”

--Scott Johnson, Bloomberg Economics.

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Ahead of parliamentary elections next week, President Vladimir Putin announced 700 billion rubles ($9.6 billion) in new pension and other payouts. Officials say that won’t hit the inflation rate this year, but economists aren’t persuaded. 

Inflation may peak at 6.9% in September before retreating to about 6% by year-end, according to Goldman Sachs Group Inc.

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