June 14, 2021

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Russia raises key interest rate to 5.5% as it struggles to control inflation

3 min read

Russia’s central bank has raised its key interest rate by 50 basis points and forecast more increases to come as Moscow struggles to tame inflation, which is running at its highest level for almost five years.

The third consecutive rise since March and second in a row of the same scale took Russia’s reference rate to 5.5 per cent.

Speaking after the decision was announced, central bank governor Elvira Nabiullina struck a hawkish tone and said the bank had considered raising rates by 1 percentage point in its attempt to combat sharp rises in food prices.

“Inflation is a growing concern . . . There is high probability of another rate hike in July,” Nabiullina said at a press briefing. “Our main goal is to bring the pace of price rises under control as quickly as possible.”

Annual consumer inflation in Russia rose to 6 per cent last month — the highest level since October 2016, and well above the central bank’s target of 4 per cent. The trend is being driven by the relaxation of Covid-19 restrictions, helping the economy recover faster than expected from the impact of the pandemic, and a sharp rise in global food and commodity prices.

“A viable alternative would be a series of smaller 25bp rate hikes, but the totality of [the bank’s] hawkish message and evident underlying inflationary pressures make larger moves likely,” Ivan Tchakarov, head of Russia economics at Citigroup, wrote in a research note.

Rising prices, particularly for food, are a political problem for the Kremlin in a country where 20m people — or one in seven — live below the poverty line, and memories of rationing and hyperinflation are less than a generation old.

Moscow has imposed some price caps on key household products and is considering new export quotas or additional duties on food products if global prices continue to rise, the country’s economy minister told the Financial Times last week.

President Vladimir Putin said last week that inflation was one of Russia’s “two most urgent problems”, alongside a rise in unemployment since the coronavirus pandemic began.

Nabiullina said on Friday that inflation would probably only start to decline in the autumn.

“All factors combined, including stimulating monetary and fiscal policy in large economies, increase the risk that the acceleration of inflation, not only in our country, but also in most other countries, is of a more sustained nature than it seemed at first glance,” she said.

The bank said it expected annual inflation to return to its target “in the second half of 2022” and then remain “close to 4 per cent further on”.

The rouble traded lower on Friday, with one dollar buying Rbs71.91 after the central bank’s announcement. Russia’s currency has risen 8 per cent since mid-April over rate rise expectations and stronger oil prices, and is at an 11-month high against the dollar.



2021-06-11 10:18:45

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