Russia raises key rate to 7.5%

Russia raises key rate to 7.5%

The Bank of Russia has increased the key rate for the sixth consecutive time - by 0.75 percentage points to 7.5% per annum, adding that it holds open the prospect of further key rate rises at upcoming meetings.

"On 22 October 2021, the Bank of Russia Board of Directors decided to increase the key rate by 75 b.p. to 7.50% per annum," the regulator said in a statement following its board meeting on Friday.

The Central Bank’s decision turned out tougher than market projections due to the dynamics of inflation, which is developing substantially above the regulator’s forecast. Meanwhile the contribution of persistent factors to inflation remains considerable on the back of faster growth in demand relative to output expansion capacity, the Bank of Russia explained.

"In this environment, given that inflation expectations are up again, the balance of risks for inflation is markedly tilted to the upside. This may bring about a more sustained deviation of inflation from the target," according to the regulator’s statement.

"If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings," the Central Bank noted. It has also upgraded its outlook on the average key rate to 7.3-8.3% from 6-7% for 2022, and to 5.5-6.5% from 5-6% for 2023. In 2024, the key rate is expected at 5-6%.

The Bank of Russia has largely revised its base-case macroeconomic forecast, though its GDP growth projections remained intact. In particular, the regulator expects GDP growth at 4-4.5% in 2021, and 2-3% per annum in 2022-2024.

At the Friday meeting the Central Bank upgraded its inflation outlook for 2021 to 7.4-7.9% from 5.7-6.2%. Annual inflation in Russia rose to 7.4% in September (after 6.7% in August), and went up to 7.8% as of October 18, according to the regulator.

Its Urals oil price projections were upgraded as well - to $70 from $65 per barrel for 2021, and to $65 from $60 per barrel for 2022. The Central Bank expects the Urals price at $55 per barrel in 2023, and at $50 per barrel in 2024.

The regulator seriously upgraded its outlook on capital outflow from Russia - to $80 bln from $50 bln for 2021, and to $65 bln from $35 bln for 2022. The outlook for 2023 was also raised - to $30 bln from $25 bln, whereas the 2024 projection remained unchanged at $25 bln.

Moreover, the Bank of Russia increased its outlook on growth of mortgage lending in the country for 2021 to 23-27% from 20-24%. The outlook was also revised to 15-19% from 14-18% for 2022, and remained at 14-18% for 2023. The regulator published its 2024 projection as well (12-16%).

The Central Bank’s forecast on lending growth rates was also changed - to 21-25% from 18-22% for 2021, and 14-18% from 12-16% for 2022. The regulator left the 2023 outlook unchanged at 10-14%, and added its expectations for 2024 (7-11%).

The next rate-setting meeting is scheduled for Dec. 17.