The CBR began a cycle of interest rate hikes in an attempt to limit price increases

(Generalized version. Statements of the head of the CBR, analysts added. New edition of the text and title)

MOSCOW, July 21 (Reuters) – Russia’s Central Bank decided on Friday to raise its key interest rate by 100 basis points to 8.50% per annum and is likely to continue its tightening cycle, CBR head Elvira Nabiullina said.

The CBR’s decision did not coincide with the consensus, which suggested a more modest step of 50 basis points.

“The Bank of Russia allows for the possibility of further raising the main interest rate at subsequent meetings in order to stabilize inflation near 4% in 2024 and beyond,” the CBR statement said.

According to Nabiullina, significant changes in the economy forced the start of a policy tightening cycle: an increase in consumer demand, an acceleration of current inflation, including its stable components, a weakening of the ruble and an increase in inflation expectations.

“In particular, we looked at options for a 75 basis point and 100 basis point rate hike. Specifically, because there were also proposals for a more radical increase in the exchange rate, e.g. in order to further minimize the need to increase it,” said Nabiullina.

“Based on the analysis of the situation, the assessment of all risk balances, we decided that the best solution would be to raise interest rates by 100 basis points. What next step will be taken will depend on how the economy develops, what data comes in, how the economy reacts to our step in monetary policy, she added.

At the same time, the CBR raised the lower bar in the inflation forecast for 2023 and now expects that, taking into account the monetary policy pursued, annual inflation will be 5.0-6.5% in 2023, compared to 4.5-6.5% in the previous forecast.

Nabiullina said that pro-inflationary risks for the baseline scenario are high and the inflation forecast for this year may be refined later.

With the increase in domestic demand, the CBR is concerned about the recent weakening of the ruble.

“The dynamics of domestic demand and the weakening of the ruble since the beginning of 2023 significantly increase the pro-inflationary risk,” said the regulator.

“The increase in demand also contributed to the rapid revival of imports, which, together with the decline in exports, contributed to the weakening of the ruble. The recent move in the exchange rate has not yet been fully translated into prices,” Nabiullina said.

According to the Central Bank, when the exchange rate weakens by 10%, annual inflation increases by about 0.5-0.6 percentage points.

“In addition to the direct translation of changes in the ruble exchange rate into prices, we are concerned about possible side effects. The dynamics of the exchange rate affects the inflation expectations of the population and enterprises. They remain elevated and unanchored. And in July they grew up – says Nabiullina.

CBR will continue to closely monitor the further dynamics of inflation expectations and take them into account when making interest rate decisions.


The main factor behind the weakening of the ruble in the June-July period is the consequences of the ongoing decline in exports while increasing imports, Nabiullina said.

“Usually, a weakening exchange rate leads to a reduction in import demand, but so far this has not happened. There are two reasons for this. The first is contract delay. The imports that now enter the country were purchased at the exchange rate from the date of concluding the supply contract some time ago, she explained.

“The second and main reason is that as domestic demand increases, import demand also increases. According to this logic, the weakening of the exchange rate is another confirmation that domestic demand has increased significantly, said the head of the NBP.

She dismissed suggestions that the weakening of the rudder was due to exporters holding back the sale of foreign exchange profits in the market, leaving them in offshore accounts.

“We continue to monitor. Several factors affect the sales volume of exporters in the foreign exchange market – this is the fact that part of the export income has been converted into rubles, and therefore it is the importers who buy foreign currency on the market, and then pay accordingly for our exports in rubles. From the point of view of the currency part of export proceeds that goes to our country, this share has not decreased in any way, the volumes of our exports have decreased,” said Nabiullina.

The CBR monitors how much money exporters leave in their accounts abroad. According to him, these are small funds, around 1% of export proceeds.

The rate hike will support the ruble, said Igor Rapochin of Sberbank.

“We believe the rate will be raised in September and October. Our forecast for the main interest rate at the end of the year is 9.5%,” said Rapochin.

“For the ruble, the impact of the exchange rate is moderately positive. When non-residents leave the market, an increase in profitability will not lead to an influx of foreign investment. At the same time, higher rates, with other parameters unchanged, motivate the population to save more. This means that the demand for imports and the pressure from imports on the exchange rate will be lower, Alfa Capital experts believe.

The ruble will also strengthen

KBR decision

“mirror” on market operations related to investing NWF funds in ruble assets, as the daily sales volume of yuan from August 1 will increase by 2.3 billion rubles. (Elena Fabrichnaya, Alexander Marrow, Vladimir Soldatkin, Daria Korsunskaya, Gleb Stolyarov. Editor Dmitry Antonov)


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