On October 25, the Central Bank of Russia announced a significant increase in the key interest rate by 200 basis points, bringing it to 21%, marking a historic high.
In a statement, the bank highlighted that the current inflation levels are notably higher than their forecast made in July. Inflation pressures are approaching their peak levels since the beginning of the year, with expectations for further increases. The domestic demand is growing at a pace that far exceeds the capabilities to expand the supply of goods and services. Additionally, budgetary expenditures expected for 2024 and the associated federal budget deficit are also contributing to inflationary effects. The Central Bank believes that further tightening of monetary policy is necessary to ensure inflation returns to target levels and to reduce inflation expectations. They have not ruled out the possibility of raising the key interest rate at their next meeting.
As of October 21, the annual inflation rate in Russia stood at 8.4%, with expectations that it will settle between 8.0% and 8.5% by the end of 2024. The Central Bank projects that, considering the current monetary policy, inflation will decrease to 4.5% to 5.0% in 2025 and further to 4.0% in 2026, maintaining future levels in line with their target.
The bank noted that while Russia’s economy continued to grow in the third quarter of this year, the growth rate has been more moderate compared to the first half of 2024. This slowdown is largely attributed to increased supply-side constraints, including reduced idle capacity and labor resources. The labor market in Russia remains tight, with many sectors experiencing acute labor shortages, leading to wages growing faster than productivity. Meanwhile, monetary conditions are tightening, as interest rates in money and debt markets, as well as credit and deposit rates, have all risen since mid-September.
The Central Bank also announced plans to release comments on the key interest rate and mid-term forecasts on November 6, with a meeting scheduled for December 20 to discuss the next steps regarding the key interest rate.
