The Central Bank of Russia announced a 200 basis point interest rate hike, raising the benchmark rate from 19% to a historical high of 21%, while the market generally expected a 100 basis point increase. Policymakers claimed that further tightening of monetary policy is needed due to the continuous rise in prices.
The Central Bank of Russia issued a statement saying: "In the medium term, inflation risks are still significantly skewed to the upside, so we are open to the possibility of raising interest rates at the next meeting."
As a key indicator for formulating monetary policy, inflation expectations continue to rise, reaching 13.4% in October, higher than the previous month's 12.5%. Although the Central Bank of Russia has promised to bring the inflation rate closer to the target level next year, it currently looks extremely challenging.
In September, the CPI rose by 8.6% year-on-year, slowing down compared to the previous month, but still far above the central bank's 4% target. The Russian government plans to increase military spending in 2025, so inflationary pressures are unlikely to cool down soon.
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Oxford Economics analyst Tatiana Orlova pointed out that the Central Bank of Russia needs to restore credibility because its verbal commitments to reduce the inflation rate to 4%-4.5% next year sound somewhat wishful thinking.
Due to the significant excess of domestic demand growth in Russia over the capacity to supply goods and services, and the expansion of fiscal spending and related federal budget deficits, these factors will exacerbate inflation.
The Central Bank of Russia expects that, with a continued tightening stance on monetary policy, the inflation rate is expected to be between 4.5% and 5.0% in 2025 (previously forecasted at 4.0% to 4.5%), expected to reach 8%-8.5% by the end of 2024 (previously expected at 6.5%-7%), and to reduce to the target level of 4.0% by 2026.
The economy remains overheated but has slowed down compared to the first half of 2024, mainly due to increased supply-side constraints, including spare production capacity and labor resources. Domestic demand is supported by the growth of household and corporate income, loan growth, and increased fiscal spending, which helps to maintain consumption and investment, thereby supporting economic activity.The labor market remains tight, with the unemployment rate still at a historic low, and the labor shortage in many industries is becoming increasingly severe, which has also led to a continuous rise in wages.
The International Monetary Fund (IMF) raised its economic growth forecast for Russia in 2024 from 3.2% to 3.6% this week, but lowered its economic growth forecast for next year from 1.5% to 1.3%.
The European Bank for Reconstruction and Development stated that Russia's economic growth has also been affected by Western sanctions, as Russia needs to produce substitutes for the goods it is prohibited from obtaining, which has also driven economic growth.
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