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Home Economy

Russia raises rate and is open to further hikes

4 years ago
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Russia’s central bank became the third emerging market central bank to raise its key interest rate this week, saying a faster-than-expected recovery of economic activity and rising inflation called for a return to neutral monetary policy and it was open to further rate hikes.

The Bank of Russia raised its key interest rate by 25 basis points to 4.50 percent, the first rate hike since December 2018 when the bank raised its rate for the second time that year to stamp out the risk of a rise in inflation from a fall in the ruble that had been hit by fresh sanctions by the United States.     

But this brief period of tightening gave way to a return to an easing path in June 2019 after which the Russian central bank cut its rate 9 times and by a total of 350 basis points – including four cuts last year in response to the COVID-19 pandemic – as inflation declined.     

Russia has weathered the pandemic better than many economies and today’s rate hike comes after the central bank at its last meeting in February said the room for further monetary easing had been exhausted. Not only did the central bank last month raise its forecast for inflation but also its expectation for how quickly the economy would return to its pre-pandemic level.     

“The pace of economic recovery is higher than expected,” the central bank said today, adding inflation in the first quarter of this year was higher than it had expected and the balance of risks had now shifted toward pro-inflationary factors.     

Russia’s rate hike follows that of its fellow emerging market economies of Turkey and Brazil, which also raised their rates this week in response to growing inflationary pressures, boosting the number of central banks that have raised key rates this year to 12.     

Russia’s inflation rate has accelerated in the last 9 months and hit 5.67 percent in February from 5.18 percent in January, reflecting the recovery of demand and some supply constraints. But the central bank expects inflation to peak in March and then decline and gradually return to close to its 4.0 percent target in the first half of 2022 and remaining at that level.     

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“That said, the Bank of Russia holds open the prospect of further increases in the key rate at its upcoming meetings,” the bank said, adding it would continue to determine the timeline and pace of a return to a neutral policy stance by taking into account inflation along with economic and financial market developments.     

This year and onwards, the central bank expects Russia’s economy to gain support from an improved outlook for the global economy and further fiscal support measures around the world, which will accelerate demand for Russia’s export of commodities.     

But the central bank also cautioned of volatility in financial markets as the faster-than-expected recovery of the global economy, along with continued extremely accommodative policies in advanced economies, may lead to an earlier normalization of monetary policy.     

Source: centralbanknews
Via: norvanreports
Tags: Bank of RussiaCOVID-19 pandemicrise in inflationruble
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