The board of the Central Bank of Russia (CBR) resolved to keep the key interest rate unchanged at 16% at the policy meeting on April 26, making a third meeting in a row that the rate is maintained flat.

Maintaing the key rate at 16% is in line with the consensus expectations previously reported by bne IntelliNews.

To remind, in 2023 the CBR was forced to play catch-up with persistently high inflation: in less than five months the key rate has more than doubled from 7.5% to 16%. But in February the CBR kept the key rate flat, making the first neutral key interest rate decision since July 2023, and again maintained the rate unchanged at the policy meeting in March.

In April the CBR sees no room for the immediate key rate easing as the "annual inflation has not changed significantly since the beginning of March and, according to the assessment as of April 22, amounted to 7.8% [year on year]," the CBR commented.

Moreover, the CBR has worsened its inflation forecast for 2024 to 4.3%$-4.8% versus 4%-4.5% previously guided in the February forecast, and still away from the 4% regulator’s target. 

The regulator continued to be concerned over economic overheating, noting that labour shortages as the main constraint to expanding the output of goods and services, while in 1Q24 the economy grew faster than expected amid growing incomes and persistently high consumer activity.

Seeing the inflationary and demand trends interacting, the CBR thus warns that "due to continued strong domestic demand, which exceeds the potential for supply expansion, inflation will return to target somewhat slower than the CBR forecast in February".

Thus, the CBR also increased the average key rate forecast to 15%-16% and 10-12% in 2024 and 2025, respectively. 

Pro-inflationary risks persist in the medium term, the regulator warns, associated with changes in foreign trade conditions, persistence of high inflation expectations and deviation of the Russian economy upwards from the trajectory of balanced growth, as well as the trajectory of normalisation of fiscal policy.

The pro-overheating arguments of the central bank are underpinned also by the upwards revision of the GDP growth forecast for 2024 to 2.5%-3.5% from the previous 1%-2%, much higher than the latest official government guidance.

The wording of the CBR could be seen as rather hawkish and not in line with previous forecasts of the analysts that the CBR will proceed with the key rate cutting either this summer or autumn.
Some analysts believe that should inflation not retreat significantly, the CBR could leave the key interest rate at 16% throughout 2024.

"Borrowers should be prepared for the fact that money in the economy will remain expensive for a long time, and possibly even rise in price," Sovcombank's chief analyst Mikhail Vasilyev warned RBC business portal after CBR’s key rate decision.

However, despite the central bank’s insistence that the economy is overheating, the CBR is unlikely to face any pressure from the Kremlin and the government to cut the interest rates.

As covered by bne IntelliNews, most recently the Ministry of Economic Development has accepted the CBR’s stance on monetary policy by adopting its key interest guidance for the ministry’s official economic outlook.

On April 25, President Vladimir Putin also apparently gave the CBR a carte blanche to do how it pleases to control inflation. During his speech at the congress of the Russian Union of Industrialists and Entrepreneurs (RSPP) Putin justified high interest rates with the threat of inflation, while reminding that without a tight monetary policy Russia may face a situation like in Turkey, where inflation exceeds double digits.