Russia's CBR back to tough policy with first rate hike since 2018

Russia's CBR back to tough policy with first rate hike since 2018
Central Bank of Russia Governor Elvira Nabiullina. / bne
By bne IntelliNews March 19, 2021

The board of the Central Bank of Russia (CBR) at a policy meeting of March 19 has resolved to hike the key interest rate by 25 basis points from 4.25% to 4.5%, effecting the first rate hike since December 2018 (from 7.5% to 7.75%).

The CBR was largely expected to launch a monetary policy toughening cycle as inflation is far above of the 4% target, the government plans to increase spending, and geopolitical tensions spike.

However, the regulator has taken a more conservative stance than anticipated by the analysts, who forecasted an unchanged interest rate and hawkish guidance for the meeting of March 19.

Previously, as inflationary and external conditions worsened sharply in 2018, the Governor of the CBR Elvira Nabiullina showed that she was not afraid to hike the rates and famously maintained that "it is better to hike the rate a little now, than a lot later". 

The CBR attributed the latest rate hike to faster than expected domestic demand recovery, and high inflationary pressure. The CBR noted that domestic demand recovery is exceeding the output recovery pace, while external fiscal stimuli and vaccination drives are improving the outlook on external demand as well.

The CBR also clearly allowed for further rate increases in the upcoming policy meetings (next one scheduled for April).

This week Bloomberg reported citing unnamed sources that the CBR was considering moving much faster with monetary policy tightening, planning to hike the key rate by 125-150 basis points from the record-low 4.25%, versus the previous consensus expectations of a 50bp hike.