By John Miller, financial consultant – Eurasia Business News, December 18, 2021

Picture : view on New Arbat, Moscow.

On December 17, the Board of Directors of the Bank of Russia decided to raise the key rate by 100 bp, to 8.50% per annum.

The majority of analysts expected the Russian central bank to raise rate by 100 bp, only a few of them predicted another 75 bp rate hike – up to 8.25%.

“Inflation is growing above the October forecast of the Bank of Russia. The contribution to inflation from stable factors remains significant due to the faster expansion of demand compared with the possibilities of increasing output” said the Russian central bank in a statement.

“In these conditions and taking into account the growing inflation expectations, the balance of risks for inflation is significantly shifted towards pro-inflationary ones. This may lead to a more significant and prolonged deviation of inflation from the target of 4%”, explained the regulator.

In October, after raising the key rate by 75 bp. up to 7.5%, the Central Bank had given a hard signal. If inflation was about to continue, the Bank of Russia admited the possibility of further increases in the key rate at the next meetings, the regulator noted then.

The new signal repeats the October one. “If the situation develops in accordance with the baseline forecast, the Bank of Russia admits the possibility of a further increase in the key rate at the next meetings. Decisions on the key rate will be made taking into account the actual and expected dynamics of inflation in relation to the target, and external conditions and the reaction of financial markets to them”, stated the central bank.

The last time the key rate was at the level of 8.5% was from September 18 to October 29, 2017.

The growth of the key rate in 2021 :

March 19 – by 25 basis points, to 4.5%;

April 23 – by 50 basis points, up to 5%;

June 11 – also by 50 basis points, up to 5.5%;

July 23 – by 100 basis points, up to 6.5% ;

September 10 – by 25 basis points, up to 6.75% ;

October 22 – by 75 basis points, up to 7.5%.

December 17 – by 100 basis points, up to 8.5%

Rising inflation

The Russian Ministry of Economic Development had already worsened its inflation forecasts in October. According to his expectations, the rate of price growth by the end of 2021 would be 5.8 percent.

The current inflation indicators did not fit into the October forecast of the Central Bank (7.4-7.9% at the end of 2021). According to Rosstat, the Russian statistic agency, in November, annual inflation was 8.4%, which was the highest value since January 2016. In the week of December 7-13, Russian prices rose by 8.1% in annual terms. Bank of Russia did not publish an updated forecast following the meeting, but at the end of the year, under favorable conditions, it expects inflation to be in the upper bound of its expectations, said the  Governor Elvira Nabiullina. She also exceeded the forecast. “In general, somewhere around 8% [at the end of the year]” – summed up the head of the Central Bank.

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Read also : Bank of Russia raised key rate to 7.5%

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