Russia: Interest Rates Rise To 8.25% - The Right Call?

British Embassy Moscow

September 2012

Summary

Interest rates rise by 0.25% to 8.25% - the first change since last December.  In coming to a decision, the Central Bank of Russia faced a dilemma: growth is starting to slow, whilst inflation is accelerating.  The pressure of inflation, which has reached 6.3% and is pushing upwards, won out, but it was a tight call which came as a surprise for the markets – the majority of analysts had predicted no change. 

Detail

On Thursday 13 September, the Central Bank of Russia (CBR) raised its benchmark refinancing rate by 0.25%, to 8.25%.  The Bank’s overnight repo rate and overnight deposit rate were also raised, to 5.5% and 4.25% respectively.  This was the first shift since a 0.25% reduction last December, and came as a surprise to the markets – the majority consensus amongst analysts had supported no change.  The resultant correction in the exchange rate caused the rouble to rise to a four-month high against the dollar.

In a press release explaining its decision, the CBR highlighted the pace of inflation as the key factor.  The CBR’s target for inflation this year is 5-6%, but the Bank revealed that year-on-year CPI rose by 6.3% to 10 September.  Belated rises in administered prices and utility tariffs – which had been partially delayed since before the Presidential election – are partly responsible for this pressure, along with the rises in food prices being seen globally.

Several analysts noted that news of the decision came very late in the day, which suggests that there was some debate in the committee over the judgement.  It was not a straightforward call: the CBR had to weigh up the rising inflationary pressures against a slowdown in domestic growth.  The Ministry of Economics reported the previous week that GDP growth had slowed to 2.6% year-on-year in July, down from 4.5% year-on-year for the first half of 2012.  But in their press release the CBR stated that it believes domestic demand remains robust, and that current economic output is close to its potential.

Responses to the move have been mixed.  Comment in the Russian press has been largely factual, but some analysts have been more critical.  Ivan Tchakarov, a respected chief economist at Renaissance Capital in Moscow, argued strongly that, as the rise in inflation is due to temporary supply-side changes (rises in food prices due to poor harvests and deferred utility price rises), the CBR’s decision is the incorrect response, and suggests that it may lack a deep understanding about how inflation targeting monetary policy operates.

Comment

Whilst unpredicted by the majority of analysts, the CBR’s decision is not a major shock: inflation rates have been rising quickly since June when CPI was 3.6%, and many expect it to reach 7% year-on-year by the end of 2012.  The slowdown in growth rates is also of concern, but perhaps the CBR was somewhat reassured by recent developments on banking union and the European Stability Mechanism in Brussels, and the Fed’s QE3 launch in the US.

However, the balancing act between inflation and growth will continue over the coming months.  As inflation is likely to continue to rise, there may be pressure to raise interest rates further this year.  But policy makers will be watching the growth figures very closely.  The CBR will look at interest rates again in early October.

Disclaimer

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