Russia's central bank maintained its benchmark interest rate on Friday, going against forecasts for a substantial increase. The board, under Governor Elvira Nabiullina's leadership, kept the key rate steady at a record 21.00 percent, despite market expectations of a 200 basis-point rise. Since July 2023, the bank has elevated the key interest rate by 1,350 basis points.
This significant interest rate increase and the resultant slowdown in credit activities have established the necessary conditions to revive the disinflation process and return inflation to targeted levels, according to the bank. It plans to reassess the need for an interest rate hike at its next meeting, taking future lending and inflation trends into account.
While inflation is projected to remain high in the short term, the bank anticipates a decline in inflationary pressures in the coming months due to stringent monetary policies. The bank predicts that inflation will decrease to 4.0 percent by 2026 and remain at this target thereafter.
The board noted that robust domestic demand continues to drive economic activity in the third quarter, indicating that the Russian economy's deviation from a balanced growth path remains considerable.
Liam Peach, an economist with Capital Economics, commented that this decision raises questions regarding the central bank's response strategy and potential political influences. With the likelihood of rising inflation in the coming months, there appears to be a leaning towards further tightening of monetary policy, though the threshold for additional rate hikes seems higher than previously anticipated.
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