Russia Central Bank Lifts Rate By 350 Bps

(RTTNews) - The Bank of Russia raised its benchmark rate sharply by 350 basis points at an emergency meeting on Tuesday to contain the depreciation of the ruble and thereby limit the inflationary pressures. The Board of Directors of the Bank of Russia lifted the key rate to 12.00 percent from 8.50 percent.

The central bank decided to hold an extraordinary meeting after the ruble breached 100 against the US dollar on Monday.

The bank had earlier moved aggressively soon after Russia invaded Ukraine in February 2022. Then the rate was raised to 20.00 percent from 9.50 percent. But later the bank lowered the rate by a cumulative 1250 basis points.

"The decision is aimed at limiting price stability risks," the bank said today.

The steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the currency exchange rate dynamics through elevated demand for imports, the board observed.

Policymakers noted that the pass-through of the ruble's depreciation to consumer prices is gaining momentum and inflation expectations are on the rise.

The risk of inflation deviating upward from the target in 2024 is substantial, the bank said. The policy action aims to bring inflation back to the 4 percent next year and to stabilize it close to 4 percent further on.

Capital Economics' economist Liam Peach said today's rate hike will only temporarily slow the bleeding as the weakness is a consequence of many factors moving against Russia all at once.

The economist noted that the move will be followed by further increases in the coming months. However, there is little the central bank can do in the short run to contain the decline in the ruble without some strict currency controls or FX intervention.