Russia’s central bank hiked its key interest rate by a greater-than-expected 100 basis points (bps) to 8.5% on Friday, raising the cost of borrowing as the weak rouble added to inflation pressure from a tight labour market and strong consumer demand.
It was the first time the bank had raised rates in more than a year, having gradually reversed an emergency hike to 20% made in February last year after Russia sent its armed forces into Ukraine, which prompted the West to impose sanctions on Moscow. Its last cut, to 7.5%, was in September.
“Pro-inflationary risks have increased significantly over the medium-term horizon,” the bank said in a statement. “The increase in domestic demand surpasses the capacity to expand production, including due to the limited availability of labour resources.” This was reinforcing persistent inflationary pressure, it said, while the rouble’s depreciation this year was “significantly amplifying pro-inflationary risks”.
The central bank raised its year-end forecast for inflation, now just below 4% - to 5.0-6.5% from 4.5-6.5%, and said it was holding open the possibility of further hikes at future meetings.
“The much larger-than-expected 100bp interest rate hike ... underscores policymakers’ concerns about inflation risks,” said William Jackson, Chief Emerging Markets Economist at Capital Economics.
Annual inflation had fallen below the bank’s 4% target in recent months, due to the high base effect from last year when inflation spiked to its highest level for over 20 years.
Fuel exports quotas
Russia is not ruling out introducing quotas on the export of oil products to stabilise gasoline prices, Russian Deputy Prime Minister Alexander Novak said on Friday, according to state media.
He added that other ideas were being considered, and that some refineries had postponed planned maintenance to a later date.
Restoration of Black Sea grain deal
Turkish President Tayyip Erdogan said his planned talks with Russian President Vladimir Putin could lead to restoration of the Black Sea grain initiative, and called on Western countries to consider Russia’s demands, Turkish broadcasters reported on Friday.
“The termination of the Black Sea grain deal will have a series of consequences, ranging from the increase in global food prices to scarcity in certain regions and, potentially, leading to new waves of migration,” Erdogan told reporters.
“I believe that by thoroughly discussing the matter with President Putin, we can ensure the continuation of this humanitarian effort,” Erdogan added.
Russia this week quit a deal, brokered by the United Nations and Turkey, that allowed the safe Black Sea export of Ukraine grain for the past year, and revoked guarantees of safe navigation. Since then, no ships have sailed from Ukrainian ports.
Moscow says it will return to the deal only if its demands are met for easier access for its own food and fertiliser exports to world markets. Western countries say Russia has had no trouble selling food, which is exempt from financial sanctions.
“We are aware that President Putin also has certain expectations from Western countries, and it is crucial for these countries to take action in this regard,” Erdogan said.
Published in The Express Tribune, July 22nd, 2023.
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