For the first time since February 2022, the Central Bank significantly raised the main interest rate

The Bank of Russia, after a months-long break, is returning to tightening its monetary policy in response to the rapid depreciation of the ruble, which heralds the strongest inflation acceleration since the beginning of the war.

At its meeting on Friday, July 21, the Central Bank’s Board of Directors decided to raise the main interest rate by 100 basis points to 8.5% per annum. The exchange rate of the Central Bank has not changed since September last year, and its increase was the first since the beginning of the war (since February 28, 2022).

“Inflationary pressure is growing”, including due to the weakening of the ruble, the Central Bank of the Russian Federation notes in a communiqué. So far, Rosstat estimates annual inflation at a modest 3.9%, but “the current price growth rate, including a wide range of stable indicators, has exceeded 4% on an annual basis and continues to grow,” writes the Central Bank. According to his forecast, inflation may accelerate to 5-6.5% by the end of the year (previous forecast was 4.5-6.5%). At the same time, it will not be possible to return to the target 4% in 2024, the regulator admits. His forecast is 4.5-5.4%.

Since the beginning of the year, the dollar and the euro have increased against the ruble by almost 30%, and in July they updated their panic maximums from the first days of the invasion of Ukraine: 93.85 and 102.82 rubles, respectively. The devaluation set off a chain reaction of higher prices for gadgets, home appliances, cars, tourist trips and airline tickets. And although exchange rates fell from record highs – to 90.34 ruble to the dollar and 100.48 ruble to the euro on Friday – the impact on prices of the ruble weakening since the beginning of the year “may be more pronounced” than expected, the Central Bank warned.

The ruble itself also remains under pressure. “The strengthening of foreign trade and financial constraints may further weaken the demand for Russian exports and have a pro-inflationary effect through the dynamics of the exchange rate,” the Central Bank wrote in a commentary.

The market was waiting for a key rate hike, but more moderate – by 50-75 basis points. “The Central Bank is forced to act ahead of schedule, indirectly admitting its mistake by not raising rates in June,” said Dmitry Polevoy, investment director at IC Loko-Invest.

The Central Bank has improved its forecasts for the economy and now expects GDP growth of 1.5-2.5% this year, although earlier it allowed for stagnation (+0.5%). But his expectations “are based solely on his belief in the Russian consumer,” Polevoi notes: people borrow more and spend more, while the economy’s export earnings fall and the budget deficit grows.

The Central Bank’s rate hike is unlikely to be the last, warned Elvira Nabiullina, head of the regulator, at a press conference. “Theoretically, today’s rate hike may be enough, but the scenario of further tightening is more likely,” she is quoted by Interfax.