Russia Central Bank Unexpectedly Holds Key Rate

(RTTNews) - Russia's central bank left its benchmark interest rate unchanged on Friday, confounding expectations for a sharp hike.

The board of directors, led by Governor Elvira Nabiullina, retained the key interest rate at a record 21.00 percent. Markets anticipated a 200 basis-point rate hike.

The bank has raised the key interest rate by 1,350 basis points since July 2023.

Given the notable increase in interest rates for borrowers and the cooling of credit activity, the achieved tightness of monetary conditions create the necessary prerequisites for resuming disinflation process and returning inflation to the target, the bank said.

The bank said it will assess the need for a key rate increase at its upcoming meeting taking into account further lending and inflation dynamics.

Although inflation is expected to remain elevated for some time, the bank estimates that inflationary pressures will begin to decline in the coming months under the influence of tight monetary conditions.

The bank forecast inflation to ease to 4.0 percent in 2026 and stay at the target further on.

The board observed that high domestic demand is still the main driver of growing economic activity in the third quarter. The upward deviation of the Russian economy from a balanced growth path is still significant.

Capital Economics' economist Liam Peach said the decision sparks a lot of questions about the central bank's reaction function, and whether it may be starting to become subject to political pressure.

With inflation likely to rise further in the coming months the bias will be towards more tightening, but the bar for further rate hikes is higher than previously thought, the economist noted.