The Central Bank of Russia (CBR) has decided to leave the key interest rate unchanged at 21%, surprising many analysts who expected the rate to rise to 23%. This decision, announced during the bank's latest board meeting on December 20, 2024, is seen as both a reflection of current economic conditions and part of the bank's strategy to control inflation amid external pressures.
According to reports, many experts had forecasted the interest rate would be increased due to persistently high inflation, which has been projected at 9.2% for the end of 2024. The CBR's decision to maintain the rate was attributed to factors indicating reduced inflation growth over the coming months, there wasn’t significant emphasis on concluding the tightening of monetary policy.
During the meeting, CBR Governor Elvira Nabiullina noted, “We analyzed alternative scenarios, and if we had kept the rate at 7.5%, inflation would be soaring, possibly exceeding 30%.” This stark warning underlines the urgency with which the CBR has treated inflationary pressures, which they anticipate stabilizing to around 4% by 2026.
High interest rates have already begun affecting credit activity. The CBR stated, “there has been more substantial tightening of monetary conditions than was planned following the October rate decision,” reflecting efforts to temper economic activity and inflation. Increased borrowing costs for consumers and businesses have resulted, slowing credit acquisition significantly.
Experts have varied opinions on the next steps. Vasily Kutin, Director of Analytics at Ingostrach Bank, stated, “The current inflation shows greater inertia... food prices and fuel will continue to put pressure, keeping inflation high as we move toward spring.” Kutin predicts potential risks for another interest rate hike, possibly to 22-23% by February if inflation trends do not improve.
Responses from the financial sector indicate caution yet optimism. Maxim Timoshenko, CFA at Russian Standard Bank, noted, “The market consensus was for rates to rise to 23%. Now, there seems to be room for reconsideration based on new data.” Timoshenko explained how recent consumer behavior and reluctance to cut back on spending maintained pressure on prices, indicating the CBR may not yet be ready to officially shift its stance.
The inflation forecast remains pressured by geopolitical dynamics, supply chain disruptions, and currency fluctuations, with the ruble recently dropping against the dollar and euro. The CBR has tied the value of the ruble to broader economic stability, emphasizing the influence of external economic conditions on domestic inflation.
On the political front, President Vladimir Putin expressed his hopes for rational decisions by the CBR governors, urging them to curb inflation without triggering economic recession. He emphasized collaboration between the government and the CBR to manage prices effectively. Putin’s remarks highlight the tension between controlling inflation and fostering economic growth as Russia enters 2025.
The banking sector’s reactions suggest readiness for potential changes. Flask Bank's survey of short-term interest rates indicates persistent high levels, but banks may begin reflecting these changes with more competitive saving options. Michael Zelzer from BCS World Investments stated, “Depository rates may slightly adjust downwards by mid-next year as the central bank finds its footing.”
Market analysts indicate the potential for stabilizing or possibly lowering interest rates later next year, contingent on macroeconomic developments, inflation data, and international factors. Currently, the emphasis remains on monitoring the impact of previous rate hikes and general economic activity as the CBR considers its future monetary policy actions.
Looking forward, many remain cautiously optimistic. The consensus among analysts suggests readiness for the CBR to act if inflation expectations persist or risk levels change. Some forecasts indicate the economy may grow between 2% and 2.5% for the upcoming year, contingent upon these monetary adjustments.
To sum up, the CBR's decision on the key rate reflects its balancing act between managing inflation and supporting economic growth during uncertain times. Will they raise rates again to combat inflation, or will they adopt a more cautious approach? Only time will tell.
