Central Bank aims to react fast, but predictably, on rates

The Bank of Russia is ready to consider a key interest rate increase of 25 to 100 basis points next month in response to surging inflation.

Russian Central Bank Governor, Elvira Nabiullina made the announcement in an interview today on Bloomberg TV in an interview said, “we don’t see that inflation acceleration is transitory as in many other countries, but more persistent”. Nabiullina declared that the Bank of Russia aims to react fast, but predictably on rates, and added that current policy remains accommodative.

Russia’s Central Bank has turned hawkish as it struggles to control inflation that recently jumped above six per cent for the first time in more than four years, well beyond the fourt per cent target. Policy makers have increased interest rates by 125 basis points since March and warned that more monetary tightening will be necessary to curb price pressures and restrain inflation expectations.

Russia has slowly been upping interest rates

Still, the pace of increases in Russia lags that of its emerging-market peer Brazil, where policy makers have been lifting their key rate by 75 basis points at a time.

“So far, inflation data do not show that it’s easing,” Nabiullina said.

She advised that “there is no trend for inflation acceleration now, but no significant trend for its slowing either”.

The Central Bank Governor emphasised that monetary policy should be the “main tool” for fighting inflation, after the government responded to a spike in global commodity prices by imposing duties, export curbs and price controls.

The Russian Central Bank will revise up its end-year inflation forecast and, most likely, its average key rate forecast at the July 23 meeting. Russia’s recent spike in COVID-19 cases and introduction of new restrictions to contain the spread of infections may affect the economy, the Governor explained.

“It’s one of the factors of uncertainty that could influence our estimates,” she articulated. The ruble initially strengthened after Nabiullina’s rates comments before declining by 0.2 per cent against the dollar to 72.2150 as of 3.46 p.m. in Moscow, trading within a narrow range.

“We are ready to take steps that would let inflation return to four per cent,” said Nabiullina, arguing “we want to do it in a predictable way and with the least amount of surprises for the market”.