Bank of Russia increases the key rate by 200 bp to 21.00% p.a. (25.10.2024)

On 25 October 2024, the Bank of Russia Board of Directors decided to increase the key rate by 200 basis points to 21.00% per annum. Inflation is running considerably above the Bank of Russia’s July forecast. Inflation expectations continue to increase. Growth in domestic demand is significantly outstripping the capabilities to expand the supply of goods and services. Additional fiscal spending and the related expansion of the federal budget deficit in 2024 have proinflationary effects. Further tightening of monetary policy is required to ensure the return of inflation to the target and reduce inflation expectations. The Bank of Russia holds open the prospect of increasing the key rate at its upcoming meeting. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will decline to 4.5–5.0% in 2025, 4.0% in 2026, and stay at the target further on.

In September, the current seasonally adjusted price growth rose to 9.8% in annualised terms from 7.5% in August. The similar indicator of core inflation increased to 9.1% from 7.7% in August. Inflationary pressures, including underlying ones, were close to the maximum values since the beginning of the year. According to the estimate as of 21 October, annual inflation equalled 8.4% and is expected to be in the range of 8.0–8.5% by the end of 2024.

Inflation expectations increased notably. In October, expectations of households and businesses reached their highs since the beginning of the year, mainly as a reaction to the current high inflation. Short-term inflation expectations of analysts and long-term expectations calculated based on financial market instruments increased as well. High inflation expectations enhance the inertia of underlying inflation.

The Russian economy continues to grow but at a slower pace than in 2024 H1. This deceleration is mainly caused by increasing supply-side constraints, including a decrease in the availability of spare production capacity and labour resources. Domestic demand is supported by growth in lending and incomes of households and businesses, as well as by increased fiscal spending. The upward deviation of the Russian economy from a balanced growth path is still significant. This is also evidenced by high current inflationary pressures.

The labour market remains tight. Unemployment is still at its record low. The labour shortage is growing in many industries. Rising wages continue to outpace growth in labour productivity.

Monetary conditions continue to tighten. Since mid-September, money and debt market rates, credit and deposit rates have increased. The OFZ yield curve has shifted upwards at all maturities. However, growth of inflation expectations limits the tightening of monetary conditions in real terms.

High market interest rates support the propensity of households to save. The termination of the non-targeted subsidised mortgage programme since 1 July, growth of interest rates, and the tightening of macroprudential policy led to a cooling of retail lending. Contrastingly, growth rate of corporate lending remains elevated due to the significant contribution of transactions that are less sensitive to market rates. As a result, overall credit to the economy continues to grow at a high pace. The decision made by the Bank of Russia will accelerate the formation of monetary conditions required to return lending to balanced growth.

Following the Board of Directors’ key rate meeting on 25 October 2024, the Bank of Russia has updated its medium-term forecast. The baseline scenario takes into consideration updated budget projections and decisions on the indexation of administered prices and tariffs. Given the above, as well as higher current inflationary pressures and rising inflation expectations, the Bank of Russia increased its inflation forecast for 2024–2025. A return of inflation to the target and its stabilisation close to 4% will require a much higher medium-term key rate path than forecast in July.

Over the medium-term horizon, the balance of inflation risks is still significantly tilted to the upside. The key risks are associated with persistently high inflation expectations and the upward deviation of the Russian economy from a balanced growth path, as well as with a deterioration in foreign trade conditions.

The Bank of Russia takes into account the announced fiscal policy parameters. A change in these parameters may require an adjustment in the monetary policy pursued.

On 6 November 2024, the Bank of Russia releases the Summary of the Key Rate Discussion and the Commentary on the Medium-term Forecast.

The Bank of Russia Board of Directors will hold its next key rate meeting on 20 December 2024. The press release on the Bank of Russia Board decision is to be published at 13.30 Moscow time.