The board of the Central Bank of Russia (CBR) decided to hike the key interest rate by 200 basis points to 15% at the policy meeting on October 27, continuing a hawkish monetary policy as inflation defied its 2023 target. (chart)

This is the fourth consecutive key interest rate increase. At the September 15 policy meeting the CBR raised the key rate from 12% to 13%, following an emergency hike by 350 basis points in August as the ruble weakened. 

"Current inflationary pressures have intensified significantly and are building up above the CBR expectations,” the CBR commented in a press release accompanying the key rate decision.

The key rate hike of 200bp is much more aggressive than the 100bp hike that was widely expected by the market. 

This came as the CBR was forced to catch up with higher expected inflation for the second meeting in a row. While in September the regulator increased the 2023 annual inflation guidance to 6-7%, after October’s meeting it increased the forecast again to 7-7.5%.

According to the CBR, the main pro-inflationary factors are domestic demand increasingly exceeding the output capacity, leading to the economy overheating, as the regulator has consistently warned in the past. Inflation expectations remain at elevated levels, and so do the crediting growth rates.  

The CBR also signaled that it does not expect the government to help curb inflation by reining in military and social spending ahead of the 2024 presidential election year. 

“Based on the new medium-term parameters of fiscal policy, the reduction of fiscal stimulus in the coming years will be slower than previously expected," the CBR commented, reiterating its previous warnings that “it is necessary to ensure additional policy tightening to return inflation to the 4% target in 2024”.

"Given the ongoing monetary policy, annual inflation will decline to 4.0-4.5% in 2024 and will be near 4% thereafter," the CBR now expects.

Despite the actual rise in consumer prices, the inflation expectations of the population ahead of the October key rate decision actually decreased for the first time since June — from 11.7 to 11.2%. However the price growth expectations of enterprises continued to rise for the fourth month in a row, in October the indicator added 0.3 percentage points and reached 24.3%.

As covered by bne IntelliNews, after an emergency hike of the key rate amid rapid ruble devaluation, the CBR deviated from its rejection of currency controls as it reportedly sided with the government on introducing permanent mandatory foreign currency sales by exporters.

While at the end of October ruble retracted back from the RUB100 to the US dollar threshold, the analysts surveyed by RBC business portal and the CBR itself expect the national currency to remain weak in 2024 and beyond.

The analysts surveyed by RBC on the latest aggressive key rate hike believe that should the CBR see an actual reversal of the inflation trends, another interest rate increase could be averted at the next policy meeting on December 15. But cutting the key rate in the short-term horizon is seen as unlikely.

"The return of inflation to the target in 2024 and its further stabilisation near 4% assume a prolonged period of maintaining tight monetary conditions in the economy,” the CBR said in the press release.