The Bank of Russia sharply raised the rate on the background of the collapse of the ruble

The Central Bank of the Russian Federation has increased its key rate for the first time since February 2022.

Since September of last year, the rate has stayed the same.

The Central Bank permitted a rise in the key rate to battle inflation.

Following the Central Bank's decision, Sberbank and VTB have both announced an increase in their deposit rates.

At a meeting on Friday, the Bank of Russia surprised many by raising its key rate by 100 basis points to 8.5%, which was higher than the 50 basis point increase that most experts had predicted.

The regulator defended its decision by citing the rising prices: inflationary pressure is intensifying and "affecting a wider range of goods and services." Additionally, the weakening of the ruble has further increased the pro-inflationary risks.

The Central Bank announced the end of the economic recovery phase and upgraded its forecast for GDP growth this year to 1.5-2.5%. It is expecting inflation to be at the level of 5-6.5% this year, and has allowed for a further increase in the rate in order to bring it back to the target of 4% by 2024.

At a press conference following the meeting, Elvira Nabiullina, the head of the Bank of Russia, stated that although the recent weakening of the ruble has not yet been fully reflected in prices, there may be spillover effects.

She noted that the Central Bank is still keeping an eye on the amount of foreign exchange that exporters are selling, and that the proportion of earnings they are leaving abroad has not gone down - only 1% of their earnings are being kept overseas.

On Friday, the Bank of Russia announced a new mechanism that will involve the sale of yuan on the open market. The amount of sales will be determined by the expenses of the NWF, with 288 billion rubles allocated for August-January.

Nabiullina stated that the Central Bank's new foreign exchange operations with the yuan are not intended to stabilize the ruble.

BCS noted that the Central Bank had no other option, as the economic bottom had been reached in the spring, inflationary expectations of the public were increasing, and the imbalance between supply and demand for goods and services, as well as pressure on the labor market, persisted.

Sovcombank believes that the recent rate hike is the start of a tightening cycle, and they anticipate that the rate will be increased by 50 basis points to 9% at the September meeting.

Sberbank and VTB have declared that, following the Central Bank's decision, they will raise their maximum deposit rates to 10%. VTB anticipates that the average rate in the top ten banks will rise by 0.6–0.7 percentage points in the upcoming month, bringing it close to 8.5% from the current 7.67%.