Bank of Russia decided to maintain the interest rate at 7.5% amid moderate inflation, estimated at 2.5% on an annual basis in April, although this may change later this year. The monetary authority improved its forecast for the Russian economy and now expects growth entirely in positive figures, up to 2.0% for 2023.
Bank of Russia Leaves Interest Rate Unchanged for Fifth Consecutive Time
At a meeting of its Board of Directors on Friday, the Central Bank of Russia (CBR) kept its key interest rate at the current level of 7.5%. The figure has remained unchanged since September 2022. The regulator explained its decision with moderate inflation.
Due to the high base effect, annual inflation in the Russian Federation dropped significantly — to 3.5% in March, from 11% in February, and has been estimated at 2.5% as of April 24, leading Russian business daily Kommersant noted in a report.
Bank of Russia believes that the indicator was held back by the ongoing adaptation of the Russian economy to Western sanctions as well as the increased stocks in a number of commodity groups accompanied by moderate consumer demand.
The monetary authority expects inflation to remain below 4% in the coming months and to begin to gradually grow in the second half of 2023, reaching 4.5 – 6.5% at the end of the period. Previous forecasts were in the 5 – 7% range. However, expectations in the medium term are still skewed towards higher inflation risks.
These are linked to significant labor shortages in some industries, the impact of geopolitical tensions on foreign trade, including tougher sanctions that would further weaken demand for Russian goods abroad and complicate production chains, logistics and financial calculations. The CBR signaled that future rate hikes are possible, elaborating:
In the context of a gradual increase in the current inflationary pressure, the Bank of Russia, at the next meetings, will evaluate the feasibility of raising the key rate to stabilize inflation near 4% in 2024.
Russian Economy Projected to Grow 0.5 – 2.0% This Year
Among the short-term risks, the Bank of Russia highlighted “a deterioration in the growth prospects of the global economy against the backdrop of instability in the financial markets of developed countries.” At the same time, amid faster than expected increase in domestic economic activity and demand, the bank improved its forecast for Russia’s economy.
The monetary policy regulator sees the sanctioned nation’s gross domestic product (GDP) growing between 0.5% and 2.0% by the end of 2023. Its previous estimate was partially in negative territory, between a decline of 1% and an increase of 1%. Expectations for the next couple of years remained unchanged — GDP growth in the range 0.5 – 2.5% in 2024 and 1.5 – 2.5% in 2025.
The CBR’s decision to keep the Russian interest rate at its current levels comes amid statements by officials and analysts in Europe and America indicating that further rate increases, before pausing, are to be expected from the European Central Bank and the U.S. Federal Reserve in May.
Do you think the Bank of Russia will raise interest rates later this year? Share your predictions in the comments section below.
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