The board of the Central Bank of Russia (CBR) has resolved to hike the key interest rate by 100 basis points to 16% at the last December 15 policy meeting of 2023, making a fifth consecutive key rate hike. (chart)

As followed by bne IntelliNews, a hike of 100bp to 16% was a broad consensus expectation, as the CBR is forced to play catch up with persistently high inflation for the third meeting in a row. In less than five months the key rate has more than doubled from 7.5% to 16%.

After the ruble fell to RUB100 to the dollar in August, CBR Governor Elvia Nabiullina was forced to put through a whopping 350bp rate hike on August 15 to put a floor under the currency’s value. That was followed by another surprise 200bp rate hike in October – 100bp more than analysts were expecting – as the regulator moved aggressively to rein in the persistent inflation.

"Current inflationary pressures remain high. At the end of 2023 annual inflation is expected to be near the upper boundary of the forecast range of 7%-7.5%,” the CBR commented on December 15. At the same time, the CBR has reviewed the extent to which the Russian economy is overheating. GDP growth in 2023 will be higher than the October forecast and will exceed 3%, the regulator believes. 

“The deviation of the Russian economy upward from the trajectory of balanced growth in the second half of 2023 was more significant than estimated in October," the regulator said.

Analysts had previously argued that CBR’s interest rate hike to 16% could be the last in the current monetary policy tightening cycle. 

Echoing the recent statements of CBR Governor Nabiullina, the CBR reiterated that the high interest period will be prolonged. "The return of inflation to the target in 2024 and its further stabilisation near 4% presuppose a prolonged period of maintaining tight monetary conditions in the economy," the CBR wrote in the press release.

The CBR maintained its forecast for slowing inflation in 2024, with inflation expected to be 4-4.5% by the end of 2024. At the same time, pro-inflationary risks remain significant, the CBR warned.

The regulator "will make further decisions on the key rate taking into account the actual and expected dynamics of inflation relative to the target, the development of the economy on the forecast horizon, as well as assessing the risks from internal and external conditions and the reaction of financial markets to them", which was the same wording as the previous press release published in October.

The analysts surveyed by RBC business portal see the CBR keeping the same wording as a neutral signal, and anticipate the key interest rate to remain unchanged at the next policy meeting in February. The base scenario now is that cutting the key interest rate is unlikely before 2Q24.

However, Dmitry Polevoy of Astra Asset Management warned that due to the lack of a clear reaction of the economy to the interest rate increase and continuous overheating, the option of further policy tightening (17% in 1Q24), or a longer period of 15%-16% interest rate, is still on the table.