On December 20, 2024, the Central Bank of Russia (CBR) made the surprising decision to maintain its key interest rate at 21%, defying widespread market forecasts predicting it would rise to 23% or more. This decision has raised questions and concerns among analysts and investors about the underlying economic conditions affecting monetary policy.
The announcement came after inflation rates significantly soared, with November inflation climbing from 8.5% the previous month to 13.7%. This sharp escalation has surprised many, as the Central Bank had previously reported expectations of capping the year’s inflation below 8.5%. Analysts are now grappling with the impacts of factors such as the depreciation of the ruble, which has affected price levels across various sectors.
According to the Central Bank, "There has been more substantial tightening of monetary conditions than anticipated by the October decision on the key rate." Key to this decision was the significant increase in borrowing costs for consumers and businesses, as well as the cooling of credit activity which may help to slow inflation.
Aнатолий Аксаков, head of the State Duma’s Committee on Financial Markets, remarked, "This is a sober, sound and objective assessment of the situation," pointing to increased credit pressures as both expected and necessary during economically turbulent times.
It is also expected to affect how banks set their interest rates. After preceding rate increases—2% in July, 1% in September, and another 2% in October—financial institutions had already begun adjusting their loan and deposit rates upwardly, preparing for what was anticipated to be another increase. Major banks like VTB, Alpha Bank, and Sberbank raised their deposit rates before the meeting to attract clients and prevent potential cash withdrawals.
Despite these proactive measures, the CBR’s decision to hold steady could lead to resistance among banks against retaining or increasing their deposit rates, complicatively impacting consumer borrowing costs. For now, mortgage rates have hit as high as 30%, making housing less affordable for the average consumer.
President Vladimir Putin expressed optimism for the outcome of the Central Bank’s decision, stating, "I hope the decision will be balanced and meet today’s demands." His remarks acknowledge the delicate balance the CBR must maintain amid rising inflationary pressures and pessimistic economic forecasts for many sectors.
Despite the Central Bank’s focus on targets aiming at reducing inflation to around 4% by 2026, the high borrowing costs combined with slower credit growth may exacerbate existing economic challenges. Elvira Nabiullina, the Chairman of the Central Bank, has emphasized, "Excessive credit card pressure adds to inflationary risks," indicating the complex interplay between interest rates and spending behavior.
Looking forward, the Central Bank plans to reconvene on February 14, 2025, to review its monetary policy stance again, noting the need to assess the sustainability of the current key rate based on economic data and inflation trends. The results of this meeting will be pivotal as they highlight the continuing effects of monetary policy on market conditions.
Market participants remain skeptical as inflation continues to loom large. Current inflationary predictions, as reported by surveys, indicate expectation levels around 13.9%, cementing concerns about long-term economic health and consumer confidence. While tightening monetary policy over the past year was seen as necessary to manage inflation, the consequences have shown to challenge future GDP growth and investment prospects.
Overall, this unexpected hold on the key rate reflects the current economic climate where external pressures, market expectations, and fiscal policy must be carefully navigated to enable the Central Bank to address its inflation targets effectively.
Despite many proponents calling for even harsher measures against rising prices, there remains hope among some economists for gradual economic recovery and stabilization if inflationary pressures diminish as projected. April 2025 may offer the first clear signs of whether the Central Bank’s recent decisions have successfully countered rising inflation or contributed to prolonged economic instability.
