Russia’s central bank surprised markets by increasing interest rates by a larger margin than anticipated, expressing concerns about rising inflation risks even after the recent reintroduction of capital controls helped stabilize the ruble.
Governor Elvira Nabiullina, speaking in Moscow, explained that the decision to raise interest rates by 2 percentage points was the most substantial option considered among the three on the table. This marked the fourth consecutive rate hike, pushing the benchmark rate from 13% to 15%.
Despite the rate increase, the ruble continued to strengthen against the dollar, heading for the best performance among emerging market currencies.
Nabiullina emphasized that the central bank is sending a “neutral signal” regarding future policy direction but remains ready to implement further rate hikes if the measures taken thus far do not yield the desired results. The possibility of easing will only emerge when there is a “sustained” decline in inflation, expected to occur next year.
This rate hike, although necessary to combat inflation, poses risk of tipping the Russian economy into recession. However, stabilizing the ruble to gain better control over inflation has become a priority for Russia, especially as President Vladimir Putin prepares for presidential elections amid the ongoing war in Ukraine, which has now entered its 21st month.
The central bank emphasized the need for additional monetary tightening to rein in inflation, as current inflationary pressures have exceeded expectations.
Updated forecasts by the central bank suggest that inflation will end this year in a range of 7% to 7.5%, with a higher trajectory for interest rates. For the first time, the outlook indicates that price growth could surpass the target in the coming year.
Despite the ruble’s significant rally over the past month, the central bank’s decision to tighten monetary policy, which began in July, continues. This tightening started when the ruble’s depreciation was gaining momentum, and the exchange rate later weakened to levels not seen since the aftermath of last year’s invasion of Ukraine.
The Russian government’s decision to impose stricter capital movement restrictions this month, a move initially opposed by the central bank, has helped halt one of the steepest depreciation in emerging markets in 2023. However, this came too late to reverse the momentum of inflation, which remains significantly above the official target.
The tightening monetary policy is intended to reduce domestic demand, which is expected to lead to a slowdown in economic growth in 2024 but help control inflation.
The government’s new rules require major exporters to exchange their foreign earnings for rubles on the domestic market, with the measures extending through Putin’s campaign for re-election in March.
These rules have increased the supply of foreign currency in Russia, which has experienced capital outflows and declining export revenues. The ruble has strengthened by approximately 5% since the regulations took effect, although it had lost about a fifth of its value against the dollar earlier in 2023.
Inflation expectations, a key factor influencing rate decisions, decreased in October for the first time in four months. A 10% decline in the ruble is estimated to increase inflation by 0.5 to 0.6 percentage points, according to the Bank of Russia’s estimates.
The central bank’s analysts have warned that price growth in recent weeks has followed a high trajectory similar to that seen in 2021 and may exceed the current official forecast of 6% to 7%, which has been recently revised upwards.
Sofya Donets, an economist at Renaissance Capital, noted that the high pace of inflation and credit volume growth are sources of concern for the central bank, prompting further measures to temper market expectations.
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Author Faith Yakubu 
