Russia Central Bank Holds Key Rate Steady At 7.50%

(RTTNews) - Russia's central bank decided to keep its key interest rate unchanged for the second straight policy session at its December meeting as inflation started to slowdown, and pro-inflation risks are up and prevail over disinflationary risks.

However, the bank said if there is a further budget deficit expansion, tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4 percent further on.

The Board of Directors of the Bank of Russia decided to retain the key interest rate at 7.50 percent, as widely expected.

After Russia invaded Ukraine in late February, the central bank hiked its interest rate sharply to 20.00 percent from 9.50 percent. Thereafter, the bank lowered the rate by a cumulative 1250 basis points since April.

Looking ahead, policymakers will take into account actual and expected inflation dynamics relative to the target and economic transformation processes, as well as risks posed by domestic and external conditions and the reaction of financial markets, the Bank of Russia said.

Although they remain elevated, inflation expectations of households and businesses are essentially unchanged. The bank observed that pro-inflation risks are up, impacted by rising cost pressures from the labor markets due to worker shortages, worsening foreign trade conditions and a softer fiscal stance.

Recent data showed that consumer price inflation eased to 12.0 percent in November from 12.6 percent in October. According to 12 December data, annual inflation rose to 12.7 percent, which takes into account the earlier indexation of utility rates.

The bank predicts annual inflation to slow to 5.0-7.0 percent in 2023, and return to 4.0 percent in 2024.

Considering economic activity, the capacity to expand production in the Russian economy is largely hampered by tight labor market conditions amid a record drop in unemployment along with a challenging external environment.

Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic transformation processes, as well as risks posed by domestic and external conditions and the reaction of financial markets.