Bank of Russia raises key rate to last year level

 Bank of Russia raises key rate to last year level

The Bank of Russia Board of Directors decided to raise the key rate by 0.25 pp to 7.75% per annum today.

The regulator said in a press release that the decision taken is proactive in nature and is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon. In addition, there "persists uncertainty over future external conditions, as well as over the reaction of prices and inflation expectations to the upcoming VAT rate increase," the Central Bank said. The increase in the key rate will help prevent firm inflation anchoring at the level significantly exceeding the Bank of Russia’s target.

The central bank said in a statement that it expected inflation to rise to 5 or 5.5% in the first half of next year, but expects inflation to fall back to 4% by the end of 2020.

The next meeting of the Board of Directors of the Central Bank, at which the key rate will be discussed, will be held on February 8, 2019. The Bank of Russia will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA, former deputy chairman of the Central Bank of Russia Konstantin Korischenko, speaking with Vestnik Kavkaza, noted that there were several reasons for the key rate to return to the December 2017 level of 7.75%.

"First, there is uncertainty regarding the strengthening of sanctions against Russia. Second, the prospects for a possible crisis are not clear - the situation in Europe is not simple, there is no growth in Japan, there are various negative trends in the U.S., there is a clear economic slowdown in China. And these uncertainties force our Central Bank to pursue a cautious policy," he said.

In this connection, we cannot rule out that next year the key rate in Russia may exceed 8%. "Nothing can be ruled out now, although it is still not very likely. Most likely, the Central Bank will not raise the key rate at the next meeting in 2019 for reasons of psychological comfort, because any change in the rate affects the banks, which also start change their rates. But the situation will be clearer only in the spring, when both the oil trends and the sanctions situation will be known, and, perhaps, the prospects for an international crisis will also become clearer," the former deputy chairman of the Central Bank of Russia concluded.

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