Russia to hike interest rates to 8% as weak rouble adds to high inflation

Russia’s central bank is expected to hike rates to 8% on Friday, increasing the cost of borrowing for the first time in over a year as the rouble’s sharp slide adds to inflation pressure, a Reuters poll showed.

The bank has held rates at 7.5% since September, but has steadily become more hawkish in its rhetoric.

A series of rate cuts followed an emergency hike to 20% shortly after Russia despatched troops to Ukraine in February 2022.

Sixteen of 21 analysts and economists polled by Reuters on Monday predicted that Russia would increase its benchmark rate to 8% on Friday. Three forecast a 25-basis-point hike, while two predicted an increase to 8.5%.

The Bank of Russia is no longer discussing whether or not to raise rates, but by how much, said Mikhail Vasilyev, chief analyst at Sovcombank.

Russia is set to erase 15 years of economic gains by the end of 2023 after its invasion of Ukraine spurred a multitude of sanctions and prompted companies to pull out of the country, according to the Institute of International Finance.

The economy is expected to contract 15% in 2022, followed by a decline of 3% in 2023, leaving gross domestic product where it was about fifteen years ago, economists Benjamin Hilgenstock and Elina Ribakova wrote in a preliminary assessment of the impact of the war, noting that further sanctions may change their view.

Vasilyev forecast a 50-basis-point increase, arguing that the rouble’s slump since the bank’s previous meeting meant a 25-basis-point hike was no longer sufficient.

The Russian currency has been gradually weakening for most of this year as exports fall and imports recover, but pressure intensified sharply after an abortive armed mutiny in late June, sending the rouble to a more than 15-month low.

A rate hike seems inevitable, said Olga Belenkaya of Finam brokerage.

“The rate could be raised by 50 basis points to 8%, although a larger increase cannot be ruled out,” said Belenkaya, who also pointed to the importance of the central bank’s updated macro forecasts, which will be released on Friday.

Annual inflation has dipped below the bank’s 4% target in recent months, due to a favourable base effect after last year’s double-digit jump in prices. Inflation accelerated in June and is set to continue climbing due to other factors in addition to the rouble, including a labour shortage and strong consumer demand.

“A significant pro-inflationary factor in June-July was the rouble’s weakening against major currencies by 11-15% on average,” said Rosselkhozbank analysts. “We expect that the transfer of the rouble’s weakening to prices for goods and services will strengthen the upward dynamic of prices in July-September.”

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