Russia’s central bank unexpectedly lifted interest rates on Friday for the first time in more than two years, citing risks from rising inflation and geopolitical threats.
The move — predicted by only three of 41 analysts surveyed by Bloomberg — brought the country’s main lending rate from a record low of 4.25 per cent to 4.5 per cent and opened the door for further rises in the coming months.
Central bank governor Elvira Nabiullina told reporters Russia was returning to a “neutral” rate of 5 to 6 per cent, but warned “uncertainties” could stop it from reaching that target by the end of the year.
The rouble climbed slightly against the dollar after the decision, with yields on 10-year government bonds hitting their highest level in a year.
Russia’s relatively quick economic rebound after declining to follow many other countries in imposing a second coronavirus lockdown last autumn meant inflation was rising more than expected, Nabiullina said.
The central bank expects inflation to peak this month after hitting 5.8 per cent — its highest level in more than four years — earlier this week. Russia’s consumer price index is now forecast by the central bank to return to its 4 per cent target by mid-2022, rather than the end of this year.
“The decision was justified by pointing to still robust inflation pressures and elevated inflation expectations against the background of green shoots of economic recovery,” Ivan Tchakarov, chief Russia and CIS economist at Citibank, said in a note. “This would indeed be consistent with a speedier return to a neutral policy stance, thus justifying expectations that more rate hikes will ensue in the months to come.”
Brazil and Turkey, two big emerging markets, made similar decisions to Russia earlier this week, increasing their main interest rates as they seek to tamp down inflation.
Russia placed price caps on several key foodstuffs late last year after prices rapidly shot up, compounding a lengthy downturn in living standards that the pandemic exacerbated.
The central bank expects gross domestic product to grow between 3 and 4 per cent this year after falling 3.1 per cent in 2020.
“The economy is growing faster than we expected, and this growth is becoming more stable. This is happening thanks to the recovery of both internal and external demand” for consumer goods as well as exports of metals, chemicals, and food, Nabiullina said.
Many Russian sectors have already recovered or exceeded pre-crisis levels, while the hardest-hit sector, services, has seen “a significant improvement in business activity”, Nabiullina added, as restaurants, bars, and hotels all do a brisk trade in the absence of a lockdown.
Russia is prepared to react if the US toughens sanctions on Moscow’s state debt in the coming weeks, Nabiullina said.
“If there are sanctions, there might be some short-term liquidity fluctuations, but our level of state debt is very small by international standards,” she said. “We have all the instruments to cope with volatility on financial markets.”
Source: Economy - ft.com
