The Bank of Russia continues to tighten the screws on monetary policy amid accelerating inflation, which is hitting 5-year records, contrary to government forecasts.
Following the meeting on Friday, the Board of Directors of the Central Bank decided to raise the key rate for the third time in a row.
The central bank’s rate, which regulates the cost of loans in the economy and the profitability of investments in rubles, will rise from 5% to 5.5% per annum – the maximum since June last year.
“Inflation is developing above the forecast,” and the balance of risks “has significantly shifted towards pro-inflationary ones,” the regulator explains in the release.
At the end of May, the growth rate of consumer prices reached 6%, and on June 7, they came out by 6.15%. Core inflation has set a record since the end of 2015, as has food price increases that accelerated to 8%.
“Inflationary expectations of the population have been close to their maximum values for the last 4 years for several months already,” and in addition, “price expectations of enterprises continue to grow,” the central bank notes.
As of April, Russian business expects inflation to accelerate as never before in the past 12 years. At the same time, the index of inflationary expectations of wholesale companies soared to 2003 levels.
Difficulties remain in supply chains, prices in world commodity markets have skyrocketed, while central banks of developed countries may move to tightening monetary policy, which threatens volatility – all this creates risks of further acceleration of inflation, which may not return to the target level (4%) until the second half of 2022, the regulator warns.
“This creates the need for a further increase in the key rate at the next meetings,” the release says.
The money market expects at least one more sharp upward step from Elvira Nabiullina, and at the next meeting, in July, says Yegor Susin, head of the Gazprombank Strategy Development Center.
The swap quotes include an increase in the rate to 6% by the end of September, or even slightly higher, he points out.