Russian Central Bank Expected to Hike Interest Rate to 20%

By Elena Fabrichnaya

MOSCOW (Reuters) – The Russian central bank is expected to increase the key interest rate by 100 basis points (bps) to 20%, matching the level at the onset of what Russia terms a "special military operation" in Ukraine, according to a majority of analysts polled by Reuters.

Twenty-five out of 30 analysts anticipate the interest rate to reach 20% after the Oct. 25 board meeting. Five analysts predict a larger increase of 200 bps to 21%, which would set a new historic high.

"Most likely, a 20% rate with strong rhetoric targeting 21% in December," stated Anton Tabakh from Expert RA credit rating agency, attributing the rise to increased inflationary expectations amongst the population and an inflationary budget.

This month, Russia revealed a draft budget featuring a higher-than-expected deficit for the current year, anticipated increases in utility tariffs next year, and heightened military spending.

Central bank officials remarked that parts of the draft budget were surprising. Simultaneously, inflationary expectations among Russian households surged to 13.4% in October from 12.5% in September, marking a steady rise since April, with a slight dip only in September, reaching the highest level of the year.

President Vladimir Putin's economic aide, Maxim Oreshkin, suggested that inflation, currently at 8.5%, may have peaked and is now slowing down, yet emphasized the need for further actions to curb inflation.

Moreover, analysts point to the weak Russian currency, which fell 10% against China's yuan in September and has weakened against all major currencies since early August, as another factor prompting the rate hike.

"Two pro-inflationary factors have emerged since the last meeting: currency depreciation and the new budget figures," explained Natalya Orlova from Alfa Bank, asserting that the rouble's weakness is temporary.

The central bank, which forecasts an inflation rate of 7.7% by year-end, is also facing pressure from influential businessmen who argue that elevated rates are harsh on the economy. However, analysts contend that such pressure will not sway the regulator.

"Currently, its mandate remains strong as the country's leadership, having endured shocks more severe than those in 2014 and 2020, has reaffirmed its capacity to maintain stability," noted Oleg Kuzmin from Renaissance Capital.

The central bank clarified that the rationale for raising the rate to 20% in March 2022—and retaining it now—are distinct. In 2022, the regulator aimed to stabilize markets disturbed by the events in Ukraine, while now it is combating inflation.