The board of the Central Bank of Russia (CBR) at its October 25 policy meeting resolved to hike the key interest rate by 200 basis points from 19% to a record-high 21%.

As followed by bne IntelliNews, the CBR was largely expected to hike the key interest rate again by 100 percentage points to 20% on October 25, as the war-driven boost in budget spending is not helping the central bank’s crusade against inflation.

But the 200bp rate hike was more aggressive than the consensus expectations. Most notably, it takes the key interest rate to an even higher level than the emergency hike to 20% in February 2022 amid the launch of the full-scale military invasion of Ukraine. October’s key interest hike makes the third consecutive increase.

In the accompanying press-release the CBR reiterated a combination of pro-inflationary factors that underpin the hawkish decision.

“Inflation is developing significantly above the July forecast of the Central Bank of Russia. Inflation expectations continue to increase. The growth of domestic demand significantly outstrips the possibility of expanding the supply of goods and services. Additional budget expenditures and the associated expansion of the federal budget deficit in 2024 have pro-inflationary effects. Further tightening of monetary policy is required to ensure that inflation returns to target and to reduce inflation expectations,” the CBR wrote.

The CBR also sent a hawkish signal for the next policy meetings, warning that the regulator “allows the possibility of raising the key rate at the next meeting” in December.

“In the regulator's terminology, this is the most ‘tough’ formulation indicating its readiness for further tightening of the monetary policy,” Rosbank analysts commented on October 25.

According to the CBR’s forecast, given the monetary policy currently pursued, annual inflation will fall to 4.5-5% in 2025, 4% in 2026 and will remain at a 4% target thereafter. The central bank previously expected inflation to return to the 4% target as early as end-2024, but has now worsened that forecast.

The key interest rate will average 17-20%, to 21-21.3% from 28 October to the end of the year, according to the forecast. In 2025, the key interest rate is forecasted by the CBR to decrease, but only to 17-20%, in 2026 to 12-13%, and in 2027 - to 7.5-8.5%. 

The last version of the CBR forecast released in July expected a key interest rate in the range of 14-16% for 2025 and 10-11% for 2026.

The CBR also reiterated its concern with economic overheating and structural constraints such as the labour market crisis.  “The labour market remains tight. Unemployment remains at historic lows. Labour shortages are widening across a wide range of industries. Wage growth continues to outpace labour productivity growth,” the Central Bank said in the press-release.

“We believe that the end of the current year and the first half of 2025 will see record high rates, as in light of high inflation and inflation expectations, it will take a long time for confidence to return to the 4% [inflation] target,” Rosbank commented. 

Only by the second half of 2025 can scenarios for a progressive reduction in interest rates be expected, which still makes short-term deposits and instruments with floating interest rates the most interesting instruments for investments, Rosbank analysts argue.