Bank of Russia Holds Key Rate Steady Despite Rising Inflation

The Bank of Russia surprised economists by keeping its key interest rate at a record high of 21%, defying expectations of another significant hike to combat persistent inflation, reports Bloomberg.

The central bank's decision, announced Friday, comes despite inflation accelerating to 8.9% in November, more than double the bank's 4% target. Six of twelve economists surveyed had anticipated a two-percentage point increase, while two predicted a hike to 24%.

The regulator justified the hold by stating that "monetary conditions tightened more significantly than envisaged" following October's substantial 200 basis point increase.

"The achieved tightness of monetary conditions creates the necessary prerequisites for resuming disinflation processes and returning inflation to the target, despite the elevated current price growth and high domestic demand," the bank said in a statement.

The bank indicated that it would reassess the need for further rate increases at its next meeting in February. Governor Elvira Nabiullina will address the media at a press conference later today.

The central bank's decision marks a departure from its course earlier in the year, when it signaled potential for easing in the second half of 2023. Instead, the bank has aggressively raised rates since July, as its initial bet on a slowdown in price growth proved inaccurate. The bank currently projects inflation returning to its target by 2026.

The bank's strategy to cool demand by making credit expensive has so far succeeded in slowing economic growth but has not stemmed rising prices. Annual price growth as of December 16 reached 9.52%, with food inflation accelerating to 10.93%, according to weekly data from the Economy Ministry.

"The cooling of credit activity has already encompassed all segments of the credit market," the bank warned, signaling continued tightening into next year. However, the bank acknowledged that medium-term inflation risks remain tilted to the upside.

The central bank's decision offers some relief to businesses and lenders who had expressed concerns that extremely high borrowing costs could lead to bankruptcies and freeze economic activity. President Vladimir Putin appeared to acknowledge these concerns in his televised news conference on Thursday, calling for a "balanced" approach from the central bank.

The central bank's next rate-setting meeting is scheduled for February 14.