Russia Announces Rate Hikes Amidst Budget Constraints and Geopolitical Conflicts
The front of the Central Bank headquarters in Moscow, Russia. Photo: Shamil Zhumatov/Reuters
On Friday, Oct. 28, the Bank of Russia announced an interest rate hike by 200 basis points, raising the rate to 15 percent, higher than most experts' predictions. The announcement is the fourth consecutive rate hike from Russia in response to weak rubles, inflationary pressure, and increased government spending.
A basis point is one hundredth of one percent, typically used to measure inflation or other financial percentages. Since July this year, the Russian central bank has hiked rates by 750 basis points, which is a 7.5 percent increase. The bank has had four meetings to raise borrowing costs — including the latest one this Friday — and one emergency meeting back in August when the USD to ruble exchange rate dropped below 100. While most economists foresaw the continuous rate hikes prior to Friday's meeting, especially with a clear signal from the Kremlin calling for a tighter monetary policy, the majority of analysts expected a hike to 14 percent instead of the announced 15 percent.
Elvira Nabiullina, the deputy governor of the Central Bank of Russia, said government spending is a major factor in the bank's decision. With global oil prices ramping up as most investors worry about geopolitical conflicts in the Middle East, Russia is draining its budget at an even faster rate with high defense sector spending to support production for its "special military operation" in Ukraine.
The inflationary pressure at home has not been easy to tackle for leadership in the Kremlin. Rubles have been weak since the alarming collapse this summer, and the central bank started this cycle of tightening to salvage a tight labor market, increasing consumer demand and budget deficit. For the first time this year, the central bank acknowledged that it might be able to hit next year's 4% inflation target, with the year-end forecasted inflation rate for 2024 currently sitting at 4 to 4.5 percent. The previous inflation target for 2023 also seems out of reach by now, which was 6 to 7 percent. The bank has since adjusted the year-end inflation forecast to 7 to 7.5%, with the current annual inflation running at 6.38 percent.
A vendor handling a few ruble bills in Saint Petersburg, Russia. Photo: Anton Vaganov/Reuters
But this is far from the worst macro environment Russia has had these two years. Before this August, Russia had slowly reversed their rates to 7.5% since it announced an emergency rate hike to 20% at the beginning of the Russo-Ukrainian war in February 2022. In fact, it is considered a miracle itself that Russia was able to maintain a generally stable inflation rate and reverse the interest rate back to 7.5% this year during its wartime economy. Many economists have attributed the surprising domestic economic stability to Governor Nabiullina, who steered Russia through the current turmoil.
The Central Bank of Russia stated that a tight monetary environment will be maintained, but withdrew previous signals that it might need further rate hikes, which Governor Nabiullina described as a "neutral" signal. However, the bank currently has its 2023 key rate range set at 15 to 15.2%, which might warrant another small rate increase. Some economists believe the lack of hawkish guidance means we are reaching a peak rate, but analysts like Dmitry Polevoy, head of investment at Locko-Invest, sees an open door for December tightening. With no sign an end to the invasion in Ukraine, it is hard to conclude whether Russia has reached its peak rate this year.