Russia's central bank is expected to raise its key interest rate by another 200 basis points to 23% at its final 2024 rate-setting meeting this week, according to a Reuters poll, as high inflation has been exacerbated by a weaker ruble.
Twenty-three of the 27 economists surveyed expect a hike of 200 basis points, while two others forecast a more moderate increase of 100 basis points. Two others predict an even more aggressive hike of more than 200 basis points.
The central bank's benchmark interest rate was last set at 23% in 2002.
“The price growth rate has accelerated and the ruble has moved to a new, weaker equilibrium level of more than 100 against the dollar. So the regulator has no choice but to raise the rate,” said Oleg Kuzmin of Renaissance Capital.
At the previous meeting on October 25, the central bank raised the rate by 200 basis points to 21%, the highest level since the early years of President Vladimir Putin's rule, when Russia was recovering from the chaos that followed the collapse of the Soviet Union.
The move also lifted the rate above the level reached during the market panic at the start of what Russia calls its special military operation in Ukraine in February 2022.
The October hike angered business leaders who complained that with the cost of capital so high, any additional investment made no economic sense.
Andrei Kostin, CEO of Russia's second largest creditor, VTB, even suggested that against the backdrop of high military spending and sanctions, the key interest rate was not fully effective as a monetary policy tool.
NEARING COMPLETION
Weekly data from Russia shows that inflation shows no signs of slowing despite the tightening and has already exceeded the central bank's estimate of 8.5% for the whole year, according to Reuters. establishing at 8.8%.
Economists polled by Reuters estimate that inflation for 2024 is expected to be between 9.3% and 10%.
The Russian ruble lost as much as 15% against the dollar in November after the United States imposed new financial sanctions that disrupted payments for Russian energy, creating a shortage of foreign currency in the domestic market.
The ruble has since regained much of the lost ground, but volatility in the foreign exchange market has persisted as markets have adjusted to the sanctions. Most analysts now expect the ruble to stabilize at a level slightly above 100 to the dollar.
Central bank governor Elvira Nabiullina said the regulator could start gradually cutting rates in 2025, provided there are no external shocks. Analysts said an easing in the second half of 2025 was more likely.
“I do not expect a cut in the key rate in the first half of 2025. However, scenarios predicting a first rate cut in the third quarter of 2025 still seem realistic to me,” said Dmitry Kulikov of the ACRA rating agency.
“The market believes that the monetary tightening cycle is about to end,” Zenit Bank analysts said.
Analysts noted that a slowdown in business loan growth in November, to the lowest monthly value since the start of the year, also suggested the 200 basis point rise this year was enough.
“This decision will be a compromise between the acceleration of current inflation rates in November and the significant slowdown in overall lending,” said Rodion Latypov of VTB.
