On Friday, February 11, following the results of the first meeting in 2022, the Board of Directors of the Bank of Russia raised the key rate by one percentage point at once, to 9.5% per annum.

The value was the highest since April 2017.

Note that the Central Bank raised interest rates for the eighth time in a row.

The Central Bank explained its decision by the need to curb inflation.

Thus, according to the regulator's assessment, at the moment the growth rate of consumer prices in the country is "significantly higher" than the October forecast.

“Contrary to our expectations, there has not been a turning point in inflation dynamics to date.

Moreover, its stable components even increased.

The main reason is the growing imbalance in the economy.

As a result, a tighter monetary policy is required than we previously thought,” Central Bank Chairman Elvira Nabiullina said during a press conference.

According to the latest data, in January annual inflation in Russia hit a six-year high and reached 8.7%.

Moreover, in early February, price growth accelerated to 8.8%.

As explained in the Central Bank, the growth of domestic demand outstrips the pace of increasing output in many sectors of the economy.

Against this background, it becomes easier for enterprises to raise prices for their products and thereby cover the costs associated, among other things, with a rise in the price of goods on the world market.

“Many people have noticed how prices have recently increased in the markets of housing, vehicles, and domestic tourism.

These markets are the most striking examples of what growth in demand leads to beyond the possibilities of expanding supply,” Nabiullina noted.

According to her, during the pandemic, a shortage of components and problems with logistics amid quarantine restrictions became a serious challenge for enterprises.

As the head of the Central Bank emphasized, companies are gradually solving these problems, but it may take at least a year to completely eliminate them.

In addition, the further expansion of production is hampered by a shortage of labor, the chairman of the Central Bank added.

“Unemployment is lower than ever and it will be difficult for companies to recruit new workers as production expands.

In our opinion, this is a more significant and long-term challenge to supply growth than the protracted, but still temporary difficulties with logistics,” Nabiullina explained.

The Central Bank separately emphasized that the inflationary expectations of Russians and businesses still remain at multi-year highs.

This state of affairs indicates high risks of further price increases, according to experts interviewed by RT.

“Inflation expectations show exactly how people feel about the rise in price of regularly purchased goods.

In turn, for business, this is an indicator of the prices at which consumers are willing to purchase products.

A new rise in inflation expectations will indicate that people are afraid of even more price increases, so they prefer not to postpone large purchases and make them now.

As a result, business will begin to raise prices even more to cover costs, ”Nikita Maslennikov, head of the Finance and Economics department at the Institute of Contemporary Development, explained to RT.

  • AGN "Moscow"

Traditionally, Russian banks closely monitor changes in the key rate of the Central Bank and, based on the decisions taken by the regulator, independently determine the level of long-term lending and deposit rates.

Thus, the tightening of monetary policy leads to an increase in interest rates on loans and bank deposits, which allows to cool consumer demand and put pressure on inflation.

“In fact, if we had not started raising the rate last spring, inflation today would have been much higher than 10%.

Our bet prevented this.

But the actual pressure of pro-inflationary factors turned out to be much stronger than one might have expected,” Elvira Nabiullina emphasized.

In search of balance

The next meeting of the Board of Directors of the Bank of Russia is scheduled for March 18.

At the same time, during their first spring meeting, the top management of the regulator may again raise the rate, Elvira Nabiullina did not rule out.

“We admit the possibility of its further increase at the next meetings.

At the same time, our focus will be on the rate of slowdown in the stable components of inflation,” the head of the Central Bank emphasized.

According to the forecast of the Central Bank, by the end of 2022, inflation in Russia will slow down to 5-6%, and by mid-2023 it will return to the target level of 4%.

As Elvira Nabiullina suggested, in theory, the regulator could achieve the return of the indicator to the target already this year.

However, this would require a sharper increase in the rate, which would lead to a recession in the economy, the head of the Central Bank emphasized.

  • © Bank of Russia

It is curious that against the backdrop of Nabiullina's official statements, experts again drew attention to the brooch of the chairman of the Central Bank.

Experts already traditionally perceive this accessory as a kind of non-verbal signal from the head of the Central Bank.

“Today's brooch in the form of scales by Elvira Nabiullina most likely means the Central Bank's desire to balance the balance between inflationary expectations and pro-inflationary factors.

There is hope that in the next few months we will be able to reverse the inflationary trend.

The forecast for price growth rates at the end of the year around 5-6% looks plausible.

I think that we will see somewhere around 5.5%,” says Nikita Maslennikov.

Bank response

Recall that back in 2020, amid the coronavirus pandemic, the Bank of Russia actively reduced its key rate to stimulate the economy and business activity.

So, the regulator lowered it from 6.25 to 4.25% per annum - the minimum level for the entire post-Soviet period.

However, since March 2021, the Central Bank began to raise the rate to slow down inflation.

As a result of the actions of the Central Bank over the past year, the average market mortgage rate for new buildings in Russia increased from 7.86 to 10.44% per annum, and for finished housing - from 8.06 to 10.56% per annum.

This is evidenced by the materials of the company "DOM.RF".

At the same time, the average maximum rate on ruble deposits in the ten largest Russian banks rose from 4.49% to 7.8% per annum, according to the Central Bank.

According to the forecast of the Central Bank, in 2022 the average key rate of the regulator will be in the range of 9-11% per annum.

Against this background, bank interest on loans and deposits will continue to grow, said Natalya Milchakova, deputy head of the Alpari information and analytical center.

“The more the Central Bank raises the rate, the more banks will raise their interest rates to maintain profitability.

Borrowers, of course, will not like it, but depositors, on the contrary, will be satisfied.

We believe that within six months, interest rates on loans and deposits will add another 2.5-3 percentage points, ”Milchakova suggested.

To help the ruble

According to experts, investors highly estimated the probability of a key rate increase to 9.5% in February.

Market players in their actions took into account this scenario in advance, so the decision of the Central Bank had almost no effect on the dynamics of the ruble.

At the time of the announcement of the results of the meeting of the Board of Directors of the Central Bank, the Russian currency was slightly strengthening during trading on the Moscow Exchange.

Thus, the dollar exchange rate decreased by 0.08% - to 74.95 rubles, and the euro exchange rate - by 0.71%, to 85.36 rubles.

However, in the evening trading the figures rose to 75.7 and 86.3 rubles, respectively.

Note that the increase in the interest rate of the Central Bank makes investing money in ruble assets more attractive to investors.

In particular, due to the actions of the regulator, the yield of federal loan bonds (OFZ) is increasing.

As a result, an additional influx of investments into the OFZ market has a positive effect on the dynamics of the ruble, experts say.

“Moreover, the Central Bank announced that it has no plans to return to currency purchases within the framework of the budget rule.

Thus, in the context of ongoing geopolitical risks, the actions of the Central Bank will allow the dollar to remain close to the current 75 rubles,” suggested Nikita Maslennikov.