The Bank of Russia sharply raised its key rate, strengthening the ruble

The Bank of Russia took the unexpected step of increasing the key rate by 200 basis points.

Significant increases in inflationary pressure have been observed in the Russian Federation.

At the last four meetings, the rate has increased twofold.

The ruble has reached its highest levels against the dollar in the past month and a half, falling below 93.

At its meeting on Friday, the Bank of Russia took the unexpected step of raising the key rate by 200 basis points, from 13% to 15% per annum. This was higher than the 100 basis point increase that most experts had anticipated.

The key rate has been increasing for four months in a row now. In June, it was at 7.5%, which was a twofold increase from the previous four months.

The Bank of Russia noted in its statement that current inflation pressure has risen drastically and is surpassing their expectations. Inflation expectations are still at a high level, and lending growth rates remain strong.

The Bank of Russia has revised its inflation forecast to 7–7.5% by the end of 2023, which is higher than the previously expected 6–7%. To bring inflation back to the target of 4% in 2024, the regulator has stressed the need for additional policy tightening.

The Central Bank removed the signal about assessing the feasibility of raising the key rate at the next meeting from its statement.

At a press conference, Elvira Nabiullina, the head of the Central Bank, stated that currency restrictions will only have a short-term effect on the ruble exchange rate, and that the main factors will be monetary policy and trade dynamics. She also noted that the Central Bank does not have any predetermined limits for the ruble exchange rate, but they do take it into consideration when making decisions.

BCS has noted the Central Bank's success in combating price inflation and the devaluation of the ruble, and does not discount the possibility of another wave of currency depreciation by the end of autumn, with a target of 90 rubles to the dollar. Conversely, Promsvyazbank does not anticipate much potential for further strengthening of the ruble.

Alexander Dushkin, asset manager of the International Private Investment Fund, expressed his surprise at the current interest rate of 14-15%, considering that inflation is supposedly only 5-7%. He remarked, “Frankly speaking, it seems a little crazy to me. This is simply unique. Either our inflation is not the same, or we have the toughest Central Bank in the world.”