On Friday, October 22, the Board of Directors of the Bank of Russia decided to raise the key rate by 0.75 percentage points to 7.5% per annum.
The value was the highest since July 2019.
Note that the Central Bank raised the interest rate for the sixth time in a row.
The leadership of the Central Bank explained its actions by the need to curb inflation.
According to the regulator, in September 2021, consumer prices in the country increased by 7.4% compared to the same period in 2020.
At the same time, by mid-October, annual inflation in Russia accelerated, to 7.8% - the highest level since 2016.
“Inflation is developing significantly higher than the forecast of the Bank of Russia and by the end of 2021 is expected to be in the range of 7.4-7.9%.
The contribution to inflation from the side of stable factors remains significant due to the faster expansion of demand compared to the possibilities of increasing output, ”the Central Bank said in a press release.
Traditionally, raising the key rate has been one of the main economic instruments for slowing inflation.
Natalya Milchakova, deputy head of the Alpari information and analytical center, spoke about this in an interview with RT.
“The increase in the interest rate makes it possible to tie up the excess money supply in circulation and send it to deposits in banks so that it does not swell and after that the uncontrolled rise in prices stops,” Milchakova explained.
At the same time, the effect of the rate hike may be reflected in inflation with a delay, says Nikita Maslennikov, head of the Finance and Economics department at the Institute of Contemporary Development.
As the specialist noted in an interview with RT, usually the actions of the Central Bank affect prices within six months.
The next meeting of the Board of Directors of the Central Bank is scheduled for December 17.
At the same time, during its final meeting in 2021, the top management of the regulator may increase the rate by one percentage point at once - up to 8.5% per annum.
This opportunity was allowed by the chairman of the Central Bank Elvira Nabiullina.
“The likelihood has increased that the level of the key rate will be higher, and the holding time of the rate at the increased level is longer than we laid down in the previous forecast,” Nabiullina said during a press conference.
According to her, inflationary expectations of citizens and businesses have again returned to the maximum of recent years.
At the same time, an additional rise in consumer prices may spur new restrictions due to COVID-19, the chairman of the Central Bank said.
“Last spring, we believed that the restrictions would lead to a strong reduction in demand, that is, they would create disinflationary risks.
This is what happened in the second quarter of 2020.
But the experience of subsequent waves of the pandemic showed that demand is less and less subject to restrictions, but supply is reduced due to the suspension of enterprises.
We believe that now the impact of the restrictions is more likely to be pro-inflationary, ”explained the head of the Central Bank.
© Bank of Russia
In addition to the official statements of Elvira Nabiullina, experts again drew attention to the brooch of the Central Bank chairman.
Experts perceive the accessory as a kind of non-verbal signal from the head of the regulator.
“Today's Nabiullina brooch in the shape of a bow with a loose bowstring is a signal that the Central Bank will, of necessity, continue to tighten monetary policy in order to achieve the inflation target of 4%.
Most likely, the signal was addressed to the government, since it is precisely the joint efforts of the regulator and the Cabinet of Ministers that are needed to effectively combat price increases, ”explained Nikita Maslennikov.
According to the Central Bank's forecast, by the end of 2022, inflation in Russia may drop to 4-4.5%.
In subsequent years, the growth rate of consumer prices will remain close to the target 4%, according to the Central Bank.
In this regard, the regulator has also updated the forecast trajectory of the key rate for the next few years.
According to the Bank of Russia, in 2022 the rate will average 7.3-8.3% per annum, in 2023 it will decrease to 5.5-6.5%, and in 2024 it will return to the range of 5-6% ...
Currency optimism
In their forecasts, analysts interviewed by RT highly rated the likelihood of a rate hike at the October meeting of the Central Bank.
At the same time, many experts admitted the growth of the indicator by only 0.25 or 0.5 percentage points - up to 7% or 7.25% per annum, respectively.
Against this background, the decision to raise the rate immediately to 7.5% per annum was positively received by the market and led to a noticeable strengthening of the ruble.
After the announcement of the results of the meeting of the Board of Directors of the Central Bank, the dollar exchange rate on the Moscow Exchange immediately decreased by 1.8% - to 69.82 rubles, and the euro rate - by 1.7%, to 81.28 rubles.
The last time similar values could be observed back in the summer of 2020.
The official exchange rate of the Central Bank on October 23 was set at 70.86 rubles per dollar and 82.5 rubles per euro.
Note that the increase in the Central Bank's interest rate makes investing in ruble-denominated assets more attractive for investors.
In particular, due to the actions of the regulator, the yield of federal loan bonds (OFZ) increases.
As a result, an additional inflow of investments into the OFZ market has a positive effect on the dynamics of the national currency.
“Thus, the ruble is strengthening with the growth of the key rate.
This is also facilitated by the still high oil prices.
In these conditions, we expect that by the end of the year the dollar exchange rate will fluctuate in the range of 69-74 rubles, and the euro rate - around 80-85 rubles, ”concluded Milchakova.